Climate study shows scale of stranded-asset risk

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Much of the world's proven oil and gas reserves, along with most of its coal, must stay in the ground if the Paris agreement's climate goals are to be achieved, a new academic report has found, once again raising the possibility that companies operating in these sectors are sitting on stranded assets.

The study 'Unextractable fossil fuels in a 1.5°C world', from University College London (UCL) and published in the academic journal Nature, says that by 2050 nearly 60pc of oil and gas reserves and almost 90pc of coal reserves must remain where they are if global warming is to be limited to below 1.5°C compared with pre-industrial levels.

For oil and gas, this means that production must fall by 3pc/yr globally until 2050, implying that "most regions must reach peak production now or during the next decade", the study says. But it warns that its scenario is "very probably an underestimate of what is required and, as a result, production would need to be curtailed even faster".

This is the latest in a recent slew of reports warning of the dangers of unfettered fossil fuel production. Under the IEA's Net Zero by 2050 scenario released in May, the path to reaching the Paris agreement's goals excludes any new oil and gas fields from being developed beyond those already committed, and the UN's Intergovernmental Panel on Climate Change (IPCC) just last month called for immediate and significant cuts to greenhouse gas (GHG) emissions.

The UCL study shows the inherent risks that oil and gas companies face, because it deals specifically with reserves that are assumed to be recoverable with current technologies and prices or are already producing. Firms in the hydrocarbon sector are facing a rising level of investor disquiet that their monetary worth may be undermined if assets become stranded.

The UCL study builds on one published by the same institution in 2015, which put the level of non-extractable oil, gas and coal necessary to meet climate goals at 33pc, 49pc and 80pc respectively. The increase in the latest report is down to a stronger assumed climate ambition, and changes in the outlooks for low-carbon technology and renewable energy, it says.

The new figures mean that around 409bn bl of Middle East oil should remain in the ground, representing 62pc of the region's proven reserves. The hardest hit territory, in percentage terms, is Canada where the study shows that 83pc of its oil reserves — much of which are from oil sands plays — must remain untouched. Canada is also hardest hit in percentage terms when it comes to gas, with 81pc of its reserves falling into the report's unextractable category. But the absolute number is small, and is dwarfed by the 36 trillion m³ that come under that classification in the Middle East and the 30 trillion m³ in Russia and other former Soviet Union (FSU) states. Russia and other FSU countries dominate the UCL report's coal category. It says 97pc of the region's reserves, or 205bn t, must remain untouched under its scenario.

The study is underpinned by regional production trajectories. For oil, it says output is in decline in all regions apart from the US, which will peak in 2025. For gas, it says US and Russian output has already peaked and all other regions will follow suit by 2035. UCL calls on producer countries, firms and investors to "seriously reassess their production outlooks", and said that "domestic policy measures [are] required to both restrict production and reduce demand".

The UN Cop 26 climate conference takes place in Glasgow in November. The UK, as president of the conference, is seeking to find agreement on an end to international financing for unabated coal-fired power projects and on a date for the final phase-out of coal from power generation.


By Ben Winkley

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