Oil and gas company/project exposure to a 2°C scenario

Exposure to capex outside the 2D budget varies widely throughout the curve.

Companies that have a lower percentage of unneeded capex can be seen as more aligned with a 2D budget; companies with a greater percentage of unneeded capex warrant further attention from investors. Further disclosure could be requested to explain how the company is attempting to be more “future proof” by expressly cancelling or selling high-cost projects, or reconsidering its business model entirely.

For a sample universe of companies, the percentage of total potential capex that is outside the 2D budget is shown below. Percentage of upstream capex has been arranged into bands, with companies with more than a third of capex outside of 2D having higher than average exposure.

Company	Country of headquarters	% of upstream capex outside 2D budget (% band)	2017-2035 carbon budget (GtCO₂)	Potential CO₂ outside 2D carbon budget (GtCO2)
Source: Rystad Energy, CTI analysis
Southwestern Energy	United States	60% - 70%	1.0	0.6
Apache	United States	60% - 70%	1.1	1.0
Cabot Oil and Gas	United States	50% - 60%	0.6	0.4
Energen	United States	50% - 60%	0.2	0.1
Murphy Oil	United States	50% - 60%	0.4	0.3
Concho Resources	United States	50% - 60%	0.4	0.3
Imperial Oil (Public traded part)	Canada	50% - 60%	0.4	0.2
Vermilion Energy	Canada	50% - 60%	0.1	0.1
Oil Search	Papua New Guinea	50% - 60%	0.2	0.1
Encana	Canada	50% - 60%	1.0	0.6
Chesapeake	United States	40% - 50%	1.8	1.2
Inpex	Japan	40% - 50%	1.4	0.3
ExxonMobil	United States	40% - 50%	8.6	3.1
Husky Energy	Canada	40% - 50%	0.9	0.3
Woodside	Australia	40% - 50%	0.7	0.3
Suncor Energy	Canada	40% - 50%	2.3	0.4
EQT Corporation	United States	30% - 40%	1.2	0.4
Devon Energy	United States	30% - 40%	1.6	0.5
Chevron	United States	30% - 40%	6.4	2.0
Eni	Italy	30% - 40%	4.6	1.1
Shell	Netherlands	30% - 40%	9.9	2.7
Galp Energia SA	Portugal	30% - 40%	0.3	0.1
Canadian Natural Resources (CNRL)	Canada	30% - 40%	2.0	0.5
Noble Energy	United States	30% - 40%	1.3	0.6
Repsol	Spain	30% - 40%	1.8	0.3
Newfield Exploration	United States	30% - 40%	0.4	0.2
Total	France	30% - 40%	6.3	1.2
Crescent Point Energy	Canada	30% - 40%	0.2	0.1
Hess	United States	30% - 40%	0.8	0.2
Origin Energy	Australia	30% - 40%	0.3	0.1
Rosneft	Russia	30% - 40%	9.5	1.3
Continental Resources	United States	20% - 30%	0.7	0.3
Anadarko	United States	20% - 30%	2.5	0.6
Cimarex Energy	United States	20% - 30%	0.7	0.1
Occidental Petroleum	United States	20% - 30%	1.6	0.5
BP	United Kingdom	20% - 30%	6.5	1.5
Lukoil	Russia	20% - 30%	5.0	0.5
PetroChina	China	20% - 30%	9.6	0.7
ConocoPhillips	United States	20% - 30%	3.8	0.8
EOG Resources	United States	20% - 30%	2.3	0.6
CNOOC	China	20% - 30%	2.9	0.5
Gazprom	Russia	20% - 30%	17.8	2.0
Santos	Australia	20% - 30%	0.4	0.1
Statoil	Norway	20% - 30%	4.3	0.6
Rice Energy	United States	20% - 30%	0.7	0.1
RSP Permian	United States	10% - 20%	0.4	0.1
Marathon Oil	United States	10% - 20%	1.1	0.2
OMV	Austria	10% - 20%	0.5	0.1
QEP Resources	United States	10% - 20%	0.4	0.1
Cenovus Energy	Canada	10% - 20%	0.9	0.1
Tullow Oil	United Kingdom	10% - 20%	0.3	0.0
Parsley Energy	United States	10% - 20%	0.2	0.0
Ecopetrol	Colombia	10% - 20%	0.8	0.1
Lundin Petroleum	Sweden	10% - 20%	0.3	0.0
Sinopec	China	10% - 20%	2.3	0.2
Pioneer Natural Resources	United States	0% - 10%	1.8	0.2
Peyto	Canada	0% - 10%	0.3	0.1
Petrobras	Brazil	0% - 10%	5.9	0.4
Surgutneftegas	Russia	0% - 10%	2.0	0.0
Tatneft	Russia	0% - 10%	1.1	0.0
Range Resources	United States	0% - 10%	2.0	0.0
Saudi Aramco	Saudi Arabia	0% - 10%	30.2	0.4
Novatek	Russia	0% - 10%	2.8	0.1
Arc Resources	Canada	0% - 10%	0.5	0.0
Gulfport Energy	United States	0% - 10%	0.8	0.0
Tourmaline Oil	Canada	0% - 10%	1.0	0.0
Diamondback Energy	United States	0% - 10%	0.4	0.0
Antero Resources	United States	0% - 10%	1.3	0.0
Seven Generations Energy	Canada	0% - 10%	0.7	0.0

It is clear that some companies would have to forego the majority of their options in a 2D future, significantly impacting growth plans. Other companies are already highly resilient to this scenario, including Saudi Aramco for example. Oil sands operators generally do not perform well, which reflects the ongoing challenges to expanding production with both carbon limits and export infrastructure constraints. Shale operators are spread along the cost curve, with some positions performing better than others.

Optionality and flexibility

Discussions with oil companies indicate that there is a desire to retain a certain amount of optionality to allow flexibility depending on which future emerges, responding to possible changes in oil price. In other words, to retain some higher-cost projects as future development possibilities without committing if not warranted in the price environment at the time. This is understandable, but will only deliver a 2D aligned scenario if all companies choose not to exercise this optionality. Different types of project also offer greater flexibility. For example, US shale producers have relatively short cycle options which offer greater ability to reduce investment and lower production quickly. Conversely, major projects with high initial capital investment and long payback periods such as greenfield oil sands projects or LNG plants are more difficult to wind down and expose developers to longer periods of risk.

However, such optionality is not entirely cost free – for example, companies may have to pay fees to acquire acreage even if it is not developed, or licence terms may commit them to an exploration programme. Furthermore, companies that are encouraged by higher oil prices to press ahead with such projects run the risk of being caught out by prices deteriorating after they have committed material capital, like some of those sanctioned prior to 2014’s downturn.

Company carbon budgets equivalent to the UK

It is also worth noting how significant the production of the oil majors and NOCs are in terms of the remaining carbon budget. As context, the UK-estimated carbon budget for the period 2018-32 is 6.26 GtCO₂ according to the UK Climate Change Committee. This means that a single major company is producing enough oil and gas to use up the UK’s entire carbon budget for the period. This demonstrates the importance of investors tackling climate change by ensuring major oil companies are aligning with climate objectives.

High cost projects – examples of projects outside the 2D budget

The largest projects that are outside the 2D budget can be put forward as examples of high cost options that should not be pursued in a demand-constrained world. In this exercise, high risk projects are listed in order of capex, giving an indication of the possible financial risk of developing them. The list is limited to projects which are “new”, meaning either at the discovery stage or not yet discovered (i.e. excluding projects which are already in production or under development). Undeveloped projects have lower sunk costs, and are thus easier to cancel than projects which have already received significant capital, and would therefore require the company to write that expenditure off.

Companies may have already decided to defer or cancel some of these projects, and revisit a final investment decision in the future. This is where companies can provide transparency about which projects they see are part of their future strategy, or how they think they are aligned or not with a 2D scenario. This list highlights projects that the cost curve data indicates are not consistent with a 2D scenario – the companies are best placed to indicate where in their project pipeline a project sits. Whilst a certain degree of optionality around the marginal production point is sensible, the highest cost projects are clearly those that are most at risk in a 2D world (and indeed are highest risk and lowest return in any demand scenario).

For example, the five oil projects with the highest capex not needed outside the 2D budget are shown in the table below.

Project	Kashagan, KZ	Junin-6, VE	Lulu, NS	Bonga Southwest- Aparo, NG	Bonga, NG
Source: Rystad Energy, CTI analysis
Asset	Kashagan (Phase 2), KZ	Junin-6 (Phase 2), VE	Lulu, NS	Bonga Southwest, NG	Bonga North, NG
Companies	Total, Eni, KazMunaiGaz (parent), Shell, CNPC (parent), Samruk Kazyna, ExxonMobil, Inpex	PDVSA, Rosneft, Gazprom, Gazprom Neft (Public traded part)	Saudi Aramco, Kuwait Petroleum Corp (KPC)	Eni, Chevron, Total, Shell, Lukoil, ExxonMobil	Eni, Shell, ExxonMobil, total
Life cycle stage	Discovery	Discovery	Discovery	Discovery	Discovery
Category	Conventional (land/shelf)	Extra heavy oil	Conventional (land/shelf)	Deep water	Deep water
2017-2025 potential capex	33.5	17.9	10.2	9.6	9.2
Breakeven band (15% IRR)	110-120	90-100	150+	100-110	90-100
2017-2035 carbon emissions	0.5	0.2	0.1	0.1	0.1

At the global level, some of the largest projects outside the 2D budget will be in the hands of state-owned companies, making them less transparent and moving the risks to taxpayers rather than private investors.