Climate's New Best Friend

April 2017 Casey Sattler

An unexpected question has emerged as the industry adjusts to another year of sub-$60 oil: Are low oil prices climate's best friend? It was previously assumed that high oil prices would be necessary to stifle oil demand, make renewables economically competitive and encourage governments to adopt policies that would expedite the shift away from fossil fuels. A future spike in oil prices could indeed be the final blow that makes crude oil development a sunset enterprise, but it is low oil prices that are encouraging international oil companies to adopt strategies to shield themselves against "stranded asset" warnings, which they insist are not a threat. Nowhere is this clearer than in the Canadian oil sands.

When ConocoPhillips recently agreed to sell the bulk of its oil sands assets, as well as some conventional natural gas, to Canadian firm Cenovus for C$17.7 billion (US$13.3 billion), it was merely the latest in a long string of IOC sales in this prolific, yet capital- and carbon-intensive, oil patch: Royal Dutch Shell, Statoil, Marathon Oil and Murphy Oil all pulled back in the past year.

Still, Conoco's sale of its 50% stake in the Foster Creek-Christina Lake development to partner Cenovus is notable given that the scheme is considered one of the lowest-cost in situ oil sands operations in the industry. Conoco nonetheless opted to leave the decade-long partnership and use the proceeds to pay off years' worth of maturing debt and double its share repurchases to $6 billion.

Conoco executives denied that Alberta's adoption of a carbon tax in January influenced their decision, and they made no direct mention of climate policies or the oil sands' higher carbon footprint as driving the move. Other IOCs have similarly focused on other traditional business reasons when publicly explaining their retreat.

At the same time, however, many of these firms, including Total, Shell, Statoil and Conoco, have become industry leaders when it comes to testing their portfolios and future investments against various 2°C scenarios that could severely crimp global oil demand and cap greenhouse gas emissions. They also support a global price on carbon precisely to reinforce the economic case for making "cleaner" investment decisions. So it's difficult to think that the oil sands' carbon footprint was absent from the decision-making.

For instance, Conoco tests the economic viability of its portfolio against a range of scenarios, including several variations of 2°C outcomes. These look at how advances in alternative technologies and the speed and severity with which government climate policies are adopted would erode global oil demand growth. It has concluded that the high degree of uncertainty and variability these scenarios reflect means it should only develop the lowest-cost oil supplies it can get its hands on -- even if it means forgoing production growth in periods of low oil prices.

Statoil, which has exited the oil sands completely, made clear in a recent strategy report that it seeks to build a "low-carbon advantage" by prioritizing positions that are "always safe; high-value; low-carbon." Shell's recent oil sands sale meanwhile came as the Anglo-Dutch supermajor adopted new metrics that will in part base executive bonuses on internal emissions reductions.

Stranded Assets

In effect, these oil companies are acting as if certain resources in their portfolios could have a difficult time justifying future investment when other opportunities -- including direct returns to shareholders via higher dividends and buybacks -- are on the table. This is precisely what Carbon Tracker and others supporting the "stranded asset" theory have argued, that oil companies must avoid destroying shareholder value by investing in resources that could be forced to the sidelines in a carbon-constrained world.

The industry generally offers two counters: 1) the risk of already-booked proved reserves being stranded is minimal since most barrels will be produced in the next 10-15 years, and 2) investor valuations overwhelmingly lean on these proved reserves, so little value will be destroyed.

But even if this is the case, the recent actions of many IOCs seems to lend credence to the notion that "stranded asset" concerns will impact the next leg of investments. It's higher-cost and higher-carbon projects in the Arctic, North Sea heavy oil and Canadian oil sands that have seen funds freeze up in the downturn. The IOCs that have sold producing oil sands assets have done so to domestic buyers intent on developing them, with Suncor, Canadian Natural Resources and Cenovus convinced that technological advancements, efficiencies of scale and strong government relationships can make the oil sands competitive.

But it remains an open question as to whether these firms will have enough capital to keep oil sands production growth on pace with traditional forecasts, or if the region's contribution to the global oil mix will be diminished as big foreign players turn to lower-cost, lower-carbon resources elsewhere.

Casey Sattler is Energy Intelligence’s Western Hemisphere news editor and an expert on the corporate oil sector.


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