March 4, 2013
Oil and gas companies including BP and Shell will likely see declines in cash flows and credit downgrades if world leaders implement policies to limit GHG emissions, according to a study by Carbon Tracker and Standard & Poor’s.
What A Carbon-Constrained Future Could Mean For Oil Companies’ Creditworthiness looks at how BP and Shell, along with three Canadian companies that focus on oil sands projects — Canadian Oil Sands, Canadian Natural Resources, and Cenovus Energy — would be affected by the International Energy Agency’s 450 scenario. This scenario aims to limit the global increase in temperature to 2 degrees Celsius by limiting GHG emissions to 450 parts per million (ppm) of CO2, resulting in a 35 percent reduction in oil use for transport by 2030, and 49 percent by 2035.
Limiting emissions translates into a peak demand situation, and results in a risk of downgrades for pure oil sands operators. This puts pressure on cash flows, which may result in dividends being cut or projects being cancelled, the study says.
The scenario also questions the business model of investing more capital in tar sands projects, according to the analysis.
The three oil sands operators analyzed have issued $13.6 billion of corporate bonds, with more than 50 percent of these maturing post-2020. The study says the companies may find a very different business environment when they try to refinance any of the debt that matures in the next few years.
The research concludes that credit ratings need to start looking at alternative futures, as a carbon-constrained world will not see the oil and gas sector repeat its past financial performance.
Shell has just released two predictive scenarios forecasting that global energy demand will double over the next 50 years, driving innovations that will see emissions of carbon dioxide drop to near- zero by 2100. But under both scenarios, emissions remain on a trajectory to overshoot the target of limiting global temperature rise to 2 degrees Celsius.