Greater Vulnerability to Carbon Pricing
As concerns over climate change have risen up thepolitical agenda – with many countries now enactinglegislation to regulate carbon emissions – the invest-ment community has started to analyse what risks acarbon-constrained world could pose to oil and gascompanies.Shell admits it has a problem in its latest Sustain-ability report, saying “
Our upstream energy intensityhas risen by around 27% since 2000 as felds age and more heavy and harder-to-reach oil is produced.”
In September 2008 the Global Research Depart-ment o HSBC produced a report, ‘
Oil and Carbon’
,in which it analysed the top European oil companies’potential exposure to legislation on carbon and car-bon pricing. Te report notes Shell’s increasing moveinto carbon intensive tar sands and increasing LNGproduction. It concludes that Shell’s
“above average exposure to carbon intensive projects leaves Shell more vulnerable to carbon pricing than its peers”
otal Resources Analysis
According to HSBC:
“the most commonly used mea-sure o reserves, proven and probable, is a probability-weighted assessment o a company’s reserves. Tis … un-derstates the level o a company’s potential reserve base.…it does not capture some companies’ unconventional reserves as many have only potentially become commer-cial in the past 12 months as the oil price has risen…Analternative measure, ‘resources’… is a much wider assess-ment and is an estimate o the total potential reserves or a company. Tis measure will capture a higher proportiono unconventional energy sources including oil sands,heavy oil and tight gas.”
We agree with HSBC that a total resources measureis more indicative o a company’s total carbon pro-le, and thereore we have used that measure in ouranalysis.In March 2009 the National Energy echnology Laboratory, (NEL) part o the United States De-partment o Energy, reported on the huge range incarbon intensities or oil production, depending onlocation and extraction method.
Figure 2 (above)shows that oil rom Nigeria (because o the associ-ated gas aring)and Canada’s tar sands top the listor the carbon intensity o crude oils processed in USreneries.
Company disclosure o total resources rom annualreports and strategy presentations were analysedusing the NEL carbon intensity gures in gure 2along with intensity estimates or other orms o oiland gas production drawn rom the HSBC report.
We applied these carbon intensity averages to therelevant percentages o the resource base disclosed by each company and derived a weighted average.
Te 2008 gure we used or comparison with currentproduction is drawn rom a carbon intensity analysisconducted by rucost in April 2009.
able 1 (cover page) reveals that based on reportedtotal resources, Shell’s production o oil and gas willbecome the most carbon intense o its peers. It willrise by 85 per cent rom today’s gure – an increasemarkedly greater than its competitors. Tis sharprise is due to Shell’s total resources being dominatedby unconventional and heavy oil (34.7 per cent)and LNG (16.9 per cent), as well as Shell’s ongoingreliance on Nigerian crude with its associated gasaring. Other companies, while showing an increasethat is also o concern, have not staked such a signi-cant proportion o their uture production on thesecarbon heavy resources.Shell’s uture dependence on carbon intensive,unconventional oil is illustrated succinctly in itsdisclosure o total resources rom its 2008 strategy update.
O the 66 billion barrels o oil equivalentrepresented in Shell’s 2008 chart o total resources,22.9 billion is heavy oil and enhanced oil recovery. We know that 20 billion barrels o that is tar sands
, which thereore constitutes the biggest single portiono Shell’s resources, a ull 30 per cent o its utureoil and gas production. No other oil company hasstaked so much o its uture on the dirtiest orm o oil production.Shell also has major research and development inoil shale extraction, which does not yet actor intothese resource estimates. Shell’s oil shale extractiontechnology emits between 176 and 292 kilograms o carbon dioxide equivalent per barrel o oil equivalentproduced. (kg-co2e/boe).
Shell is also aggressively seeking oil shale and tar sands production opportu-nities in Russia and Jordan.