James Leaton

Research Director

Carbon Tracker Initiative

Canada, November 2014

Our research path

Is there more carbon in fossil fuel reserves than fits with a 2°C carbon budget?

How much capital is being spent on developing more reserves?

Who are the winners and losers? Who has the cheapest production?

Carbon: Stocks vs Flows

How much carbon budget is left?

Fossil fuel carbon budget 2013 – 2050 (GTCO2)

Scenario Maximum temperature

rise

50% probability

80% probability

Pessimistic 2°C 886 500

Optimistic 1.5°C 525 -

2°C 1075 900

2.5°C 1275 1125

3°C 1425 1275

Varying Factors:• Level of aerosols

reducing warming effects

• Efforts to mitigate non-CO2

emissions (egmethane from waste and agriculture)

• Probability of temperature outcome

For 2 degrees of warming, we estimate the budget at 500-900 GTCO2

Do the math(s) – go fossil free

There is an overhang of carbon:

Fossil fuel reserves > carbon budget

• IEA: “No more than one-third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the 2 °C goal, unless carbon capture and storage (CCS) technology is widely deployed.”

• Shell: “The issue of the bubble arises because the combined proven oil, gas and coal reserves currently on the books of fossil fuel companies (and governments in the case of NOCs) will produce far more than this amount of CO2 when consumed.”

• BP: “We agree that burning all known reserves would probably cause global temperatures to rise by more than 2°C – and that addressing this issue will require the efforts of governments, industry and individuals.”

• Mark Carney, Governor of the Bank of England: “the vast majority of reserves are unburnable if global temperature rises are to be limited to below 2⁰C” “The tragey of the horizons could cause market failure”

Total reserves

= 2860GtCO2

Carbon budget to 2050

= 884 GtCO2

(IEA Redrawing the Energy Climate map 2013)

Coal, oil & gas vs emissions ceiling

• Impact on price?

• Coal most exposed

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2010-2020 2020-30

Gas Oil CoalGAS OIL COAL

CAGR% 2010-2020 2020-2030

“Only 20% of global coal reserves can be developed by 2050 without

CCS in the 450 scenario” (IEA Redrawing the Energy Climate map 2013)

IEA 450ppm scenario impacts

demand

Dealing with uncertainty

Probability of outcomes

I believe humanity is making risky bets in the climate

casino. I think it is likely that humanity will continue to make

these risky bets. In that case ExxonMobil will be proved right.

But it is always possible that humanity will wake up and make

the needed investments in rapid change, driven by the magic of

the market and technological innovation. If that happened, fossil

fuel reserves would indeed be stranded. Investors beware: the

risk of that cannot be zero.

Martin Wolf, Financial Times, June 2014

Shell, Exxon and carbon:

The elephant in the atmosphere

The investors may be correct that managers are betting their

firms on high oil prices, that this is a gamble and that applying a

discount to the value of their investments may make sense.

July 2014

China & US set the pace

• Were you expecting the bilateral announcement from US & China?

• Are you ready to take advantages of the opportunities created by a low carbon economy?

• Were you expecting US oil demand to fall?

• Were you expecting US domestic oil production to increase?

• What year do you expect Chinese thermal coal demand to peak?

The rest of the world will follow – or get left behind.

For some sectors capital flows

are dependent on emissions

Focus on potential capex at riskSplit oil, coal and gas

CAPEX TO REVIEW

Risk

$CO2

Oil &Gas : Rystad Energy database of project economics and estimated ultimately recoverable reserves

Coal: WoodMac Global Economic Model of supply and cost data

900GtCO2 Carbon Budget to 2050 as a 2°C reference scenario

Output:Breakdown by price, geography, oil type and company

Carbon Supply Cost Curves: Evaluating

Financial Risk to Oil Capital Expenditures

All reports can be downloaded at www.carbontracker.org

Demand Supply Financial Trends

Summary

Carbon Supply Cost Curves: Oil

Low demand scenario

2°C reference scenario

NEW OILSANDS

Alberta has the largest amount of expensive oil

92% of undeveloped oil sands projects need

more than $95/bbl to provide 15% IRR

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Pote

nti

al c

apex

($

m)

>US$165/bbl

US$135-165/bbl

US$115-135/bbl

US$95-115/bbl

2014-2025 Potential Capex on Discovery-Stage Oil Sands Projects requiring $95/bbl

Company

Potential capex on oil sands discoveries

requiring >$95/bbl($m)

Total capex on all projects

($m)

Oil sands discoveries >$95/bbl (% of total capex on all liquids projects)

CNRL 31,619 87,896 36%Suncor Energy 22,989 67,597 34%AOSC 22,183 34,445 64%Cenovus Energy 17,765 51,943 34%Laricina Energy 14,027 15,040 93%OSUM 9,596 9,997 96%Sunshine Oilsands 9,204 10,443 88%PTTEP (Thailand) 7,928 16,711 47%Value Creation 7,590 7,626 100%MEG Energy 7,139 19,767 36%Teck Resources Ltd 5,499 8,760 63%

2014-2025 Potential Capex on Discovery-

Stage Oil Sands Projects requiring $95/bbl

Oil majors CAPEX exposure to potential projects

requiring above $95/bbl price

Do dividends and capex add up?

Oil price dropped $30/barrel in last few months

$95

But in the context of 150 yrs of real oil price data

- Could it drop further?

And cheap gas frees up pressure on domestic

budgets for consumer spending elsewhere

Need to challenge assumptions

• Regulation• Renewables costs• Production

forecasts• Vehicle efficiency• Oil prices• Demand forecasts• Economic Growth• Commodity cycles

Chinese GDP Quarterly growth

Renewables outpacing IEA projections

0

50000

100000

150000

200000

250000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Win

d g

en

era

tio

n M

W

Year

“Financial models that only rely on past performance and creditworthiness are an insufficient guide for investors.”

Analysis of oilsands operators: “We note that under a meaningfully lower long-term oil price, the commercial viability of undeveloped reserves and hence the core business model could come into question unless development costs also fall. This could potentially result in a downgrade of more than one notch if we were to place less reliance on undeveloped or probable reserves than at present.”

What A Carbon-Constrained

Future Could Mean For Oil

Companies‘ Creditworthiness

March 2013

Impact on creditworthiness?

Do oil sands operators have a Plan B

Paul Spedding

Oil & Gas Sector

Analyst, HSBC

• “This report makes it clear that 'business-as-usual' is not a viable option for the fossil fuel industry in the long term. Management should already be looking to new business models that reduce the risk of stranded assets destroying shareholder value, In future, capital allocation should emphasize shareholder returns rather than investing for growth.”

Value or volume?

Are coal and oil approaching their

Kodak moment?

@carbonbubble#kodakmoment

Risk of stranded assets - Statoil takes oil

sands writedown

“Costs for labour and materials have continued to rise in recent

years and are working against the economics of new projects.

Market access issues also play a role - including limited pipeline

access which weighs on prices for Alberta oil, squeezing

margins and making it difficult for sustainable financial returns.

"The decision is in line with Statoil’s strategy to prioritise capital

to the most competitive projects in its comprehensive global

portfolio and is consistent with our stepwise approach to the oil

sands,”

Risk of stranded assets – investors trying to get

ahead of the curve:

I believe anyone investing in tar sands is very likely to end up with stranded assets in the next decade or two. Solar is getting cheaper by the minute, whereas petroleum is getting more expensive. It is only a matter of time before their expenses cross.Jeremy Grantham, GMO

After the latest sustainability analysis of the Energy sector, Storebrand

has excluded 13 coal and 6 oil sands companies from all investments.

The aim of these exclusions is to reduce Storebrand's exposure to fossil

fuels and to secure long term, stable returns for our clients.

Storebrand, Norway

In the case of oil-and-gas companies, the Fund has identified a number

of companies featuring substantial exposure in high-cost projects, such

as oil-extraction from oil sands. The Fund believes these companies

face serious climate-related financial risks and that it is highly likely that

these projects may either be stranded or unprofitable.AP2 Fund, Sweden

Risk of stranded assets – international bodies

taking note

OECD Secretary General,

Angel Gurria: ‘The looming

choice may be either

stranding those [high-

carbon] assets or stranding

the planet’.

World Bank President, Jim Yong Kim: ‘This

is the year to take action on climate change.

Financial regulators need to lead. Sooner

rather than later they must address the

systemic risk associated with carbon-intensive

activities in their economies’. UNEP Executive Director, Achim

Steiner: ‘Track the carbon exposure of

your investment and don’t be misled by

audited accounts which may be in the

black when in reality your company or

investment, five to 10 years down the

line, may be sitting on stranded assets’.

• Do the math – we can’t burn it all

• Need to prepare for a range of scenarios

• Stranded assets already appearing in US coal, European utilities

• Consider the fundamentals of demand and price

• Albertan oil sands are high cost, high carbon, high risk

• There will be winners and losers from the energy transition

• Companies, Investors and Governments already reviewing / reducing exposure

• What is Canada’s Plan B?

Contact: jleaton@carbontracker.org

Summary