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Shell’s Failed Arctic Plans Show Clear and Present Danger of Carbon Asset Risk

Posted by Shanna Cleveland at Sep 28, 2015 12:00 AM |
Ceres and its investors have been warning Shell that Arctic drilling projects were at extreme risk of becoming stranded due to a combination of market factors ranging from high break-even costs, oversupply, and price volatility.
by Shanna Cleveland, Director, Carbon Asset Risk (CAR) Initiative Ceres Posted on Sep 28, 2015

The outcome of Shell's failed Arctic drilling exploration demonstrates that carbon asset risk is not a far distant possibility but an imminent reality.

Ceres and its investors have been warning Shell that Arctic drilling projects were at extreme risk of becoming stranded due to a combination of market factors ranging from high break-even costs, oversupply, and price volatility. This set of factors led investors to launch the Carbon Asset Risk Initiative in September 2013 which called on oil companies like Shell to 'stress test' its investments and re-think risky projects like Arctic drilling.

As part of the Carbon Asset Risk Initiative, investors have been calling on fossil fuel companies to stress test reserves and projects with especially high costs - the Arctic and Canada’s oil sands, among those - since 2013. Pointing directly at the risks of high capital costs associated with exploration and production for such unconventional reserves and the potential that price volatility would re-emerge in the energy sector, investors urged Shell to shift it's business model and adapt for an energy transition.

Today, Ceres President Mindy Lubber explained the monumental importance of this announcement: “Shell's failed Arctic drilling endeavor is powerful evidence that the specter of stranded carbon assets is a real and growing problem for oil & gas companies. Only now, after more than $7 billion in spending and severe damage to its reputation has Shell realized that this endeavor isn't economical.  Fossil fuel companies must re-think their strategies as global fossil fuel use wanes and cleaner energy takes stronger hold.”

The bottom line: The window is closing for fossil fuel companies to shift their thinking or risk continued losses as the energy transition moves forward with or without them.

Investors will continue to press companies through engagement and shareholder resolutions to wake up to these risks and move capital into resources that will allow them to thrive in a low carbon future. Yet, many fossil fuel companies continue to pursue projects with long time frames for development and high costs. Rather than acknowledging and planning for an energy future compatible with the globally agreed upon 2 degree target, Shell continues to gamble investor capital on projects that will only be profitable in a far warmer climate.

Ceres urges Shell to learn from this experience and change its strategy now before more investor capital is gambled away. Ceres will continue to work with investors and companies to address Carbon Asset Risk.

More on Shell's move to abandon the $7 billion Arctic exploration project can be seen here.

Learn more about the Carbon Asset Risk Initiative.

Meet the Expert

Shanna Cleveland

Shanna Cleveland is a Director at Ceres where she leads the work on the Carbon Asset Risk (CAR) Initiative. The CAR Initiative, launched in 2013 in collaboration with the Carbon Tracker Initiative and with the support of the Global Investor Coalition on Climate Change, aims to prevent shareholder capital from being wasted on developing high-carbon, high-cost fossil fuel reserves that cannot be burned if the world is to avoid catastrophic climate change and drive fossil fuel companies to acknowledge and plan for the escalating physical impacts of climate change such as sea level rise, stronger storms and more severe droughts.

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