Energy Firms’ Fossil Fuel Investments Radically At Odds with Climate Change Obligations

Energy Firms’ Fossil Fuel Investments Radically At Odds With Climate Change Obligations

Big energy companies are piling money into increasingly inefficient oil and gas investments, reports Thomas Perrett

The world’s largest fossil fuel firms are spending huge sums of money on new projects that will accelerate the likelihood of climate catastrophe, according to a new report released by the financial think tank, Carbon Tracker Initiative.

The report examined the future investment plans of major fossil fuel companies, assessing their compatibility with international climate obligations set at the 2015 Paris Agreement – finding that future investments were significantly misaligned with the 1.5°C target.

Under the net zero emission estimates drawn up by the International Energy Agency (IEA), fossil fuel production must fall by 22% on 2019 levels by 2030, and by 44% on 2019 levels by 2035, to limit warming to 1.5°C. Yet, according to the Carbon Tracker Initiative, between the start of 2021 and the first quarter of 2022, Chevron, Eni, Shell, TotalEnergies and other major fossil fuel companies approved $166 billion in new oil and gas investments, $58 billion of which will only be required if demand rises to the point where global temperatures exceed 2.5°C.

“As a result of Putin’s invasion of Ukraine, 2022 has been a bumper year for the oil and gas industry,” the Carbon Tracker Initiative says – claiming that the likes of “ExxonMobil, Shell and Chevron are reporting consecutive record quarterly profits.” This, the report says, it creating a “tempting” investment environment for “new developments and exploration”.

Indeed, 62% of the investments recorded between 2021 and the first quarter of 2022 were not aligned with decarbonisation pathways agreed upon in the Paris.

By contrasting major oil and gas companies’ stated decarbonisation goals with the reality of their future production plans, the Carbon Tracker Initiative outlined how the behaviour of investors could change to exclude businesses without meaningful intentions to divest from polluting fuels.

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A ‘Carbon Bomb’

Only four companies analysed by the Carbon Tracker Initiative – Shell, BP, TotalEnergies and Eni – have published plans to reduce oil and gas production by the middle of the century. Yet their strategies lack coherence, falling significantly short of the required 1.5°C limit. While Eni published plans necessitating cuts in future production, it has in reality targeted production increases until 2025.

Similarly, TotalEnergies will increase gas production by 26% on 2019 levels by 2030 and oil production by 13%, as the energy giant has several projects in its pipeline that will reach peak production over the next decade. One such project, the Tilenga oil well in Uganda, will transport hydrocarbons to the Indian Ocean over a 1,400 mile stretch of land in Tanzania, feeding into the East Africa Crude Oil Pipeline (EACOP), the world’s longest pipeline.

EACOP, which has been described as a “mid-sized carbon bomb” by Richard Heede, co-founder of the Climate Accountability Institute (CAI), is estimated to generate 379 million tonnes of climate-destroying pollution, 25 times the annual emissions of host nations Uganda and Tanzania.

EU law-makers have also condemned human rights violations linked to the project – a joint motion tabled earlier this year called on the European Parliament to “exert maximum pressure on Ugandan and Tanzanian authorities, as well as the project promoters and stakeholders, to protect the environment and to put an end to the extractive activities in protected and sensitive ecosystems.”

The Carbon Tracker Initiative report found that next year, major energy firms will decide whether to invest up to $35 billion until 2030 in 15 major projects that are incompatible with global warming targets. Approximately two-thirds of this investment will be channelled into seven projects that are not compatible with 2.5°C limits, such as an offshore gas project in Libya developed by Eni. 

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A Financial Morass

The report warned investors that major energy firms’ pronouncements concerning divestment from fossil fuels were contradicted by their commitments to prolonged oil extraction.

“Given we see that no oil and gas producers are aligned with ‘Net Zero’ (1.5°C), investors seeking to align with this temperature outcome must either sell holdings in such companies, or meaningfully engage with companies to change strategy,” the report states.

“Investors must also ensure that companies are achieving emission reductions in a credible way, without just selling assets to create ‘space’ in production plans, or against emissions goals,” it continues. 

The changing economics of fossil fuel extraction means that investors may soon have to think twice about subsidising oil and gas companies. Oil is becoming an increasingly uneconomic resource, suffering from a declining Energy Return on Investment (EROI), meaning that more energy is being expended to produce a diminishing quality of oil.

The EROI of global fossil fuels, which peaked in the 1960s, has declined from approximately 100:1 at the turn of the 20th Century to around 3:1 now. Indeed, the diminishing returns accrued by fossil fuels are making them an increasingly expensive and ineffective energy source. According to a team of French scientists, one-tenth of the energy currently used globally is being reinvested into new energy production. By 2024, they predict, this figure will increase to a quarter, reaching half by 2050. 

The rapidly-diminishing returns of oil production may result in investors suffering from stranded assets as a result of their inability to profit from depreciating energy reserves. Even the investment bank Goldman Sachs has acknowledged the scale of this problem, publishing a study in December 2015 finding that $1 trillion of future oil investments are unprofitable. Past research carried out by the Carbon Tracker Initiative has also shown that major fossil fuel companies risk wasting $2.2 trillion in investments which may turn out to be uneconomic.

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The Big Tobacco Playbook

The Carbon Tracker Initiative report also shows that alternative sources of clean energy are becoming cheaper and more viable at scale, arguing that “a side-effect of the war in Ukraine is an ever-growing recognition that renewables – combined with enablers such as battery storage – have the solution to the energy trilemma of clean, affordable and secure energies”.

Indeed, vested political interests have stymied the transition towards renewable technologies, cynically using Russia’s war in Ukraine to advocate for prolonged oil and gas expansion.

The Corporate Europe Observatory found that the European Commission convened more than 500 meetings with fossil fuel industry representatives between December 2019 and February 2022, with Commission President Ursula von der Leyen meeting four times with the European Roundtable for Industry (ERT), an industry association which includes Shell, BP and TotalEnergies. 

This has also affected the efforts of the US to decarbonise. Immediately following the outbreak of the war, the American Petroleum Institute – among the most powerful trade associations representing the oil and gas industry – wrote a letter to US Energy Secretary Jennifer Granholm, saying that “we share the goal of reducing emissions across the economy, but we cannot let that objective detract from the clear and present need for continued responsible investment in oil and natural gas development”.

The tactics used by major fossil fuel firms to portray their products as a solution to the problem of energy security are eerily similar to those deployed by Big Tobacco to discredit the association between smoking cigarettes and cancer. According to Harvard University, “these patterns mimic the tobacco industry’s documented strategy of shifting responsibility away from corporations – which knowingly sold a deadly product while denying its harms – and onto consumers”.

The Harvard study found that the invocation of energy security as a justification for prolonged fossil fuel extraction was intended to mislead the public.

Even as the economic potential of future oil and gas extraction declines, leaving investors at risk of incurring significant financial losses, major fossil fuel companies continue to bankroll catastrophic new investments in polluting industries, which threaten to push the planet over internationally-determined global warming limits.

The Carbon Tracker Initiative’s report has demonstrated that, despite their rhetoric, the world’s most powerful energy firms show no sign of divesting from fossil fuels. And yet, any substantive divestment plan will remain toothless as long as entrenched political interests backing the oil and gas industries can continue to subvert democracy and bend the ear of power.