LONDON More than half a trillion dollars of investments in major oil projects over the next decade are at risk from high costs and low crude oil prices, an environmental think tank said on Friday, warning that shareholders' returns could suffer.
To meet anticipated future demand, oil majors including BP (BP.L), Chevron (CVX.N), and Eni (ENI.MI), are spending billions to extract harder-to-reach oil, for example from Canadian oil sands and deep below the Atlantic Ocean.
But many of the projects require high crude oil prices to turn a profit or even begin production, Carbon Tracker Initiative (CTI) said in a report on Friday, adding that some plans should be deferred or cancelled to avoid wasting capital or destroying shareholder value.
"The majors have a potential capital spend of $548 billion (328 billion pounds) over the period 2014-2025 on projects that require a market price of $95/barrel," CTI said, adding that $357 billion of this is earmarked for as yet undeveloped, high-cost ventures.
"(Cancellation or deferral) is becoming increasingly necessary as near term cash flows are not sufficient to maintain both dividends and capital expenditure plans."
CTI works to highlight to shareholders how investment in fossil fuel resources based on expectations of growing demand might be affected by the global drive to curb climate change by cutting carbon emissions.
The organisation is funded by several U.S. and European foundations, including the Rockefeller Brothers Fund and the Joseph Rowntree Charitable Trust.
Using capital expenditure and production estimates from Oslo-based Rystad Energy, CTI identified in the report 20 major oil projects forecast to cost a total $90.7 billion that it said are candidates for cancellation due to most of them needing a crude price of at least $110/barrel to break even.
Sixteen of the projects involve extraction by drilling deepwater wells or through processing oil sands.
"This capital could instead be returned to shareholders rather than being put at risk in projects that are already high cost and low return," CTI said.
According to recent estimates made by the World Bank and the U.S. Energy Information Administration, nominal crude prices are expected to rise to around $109/barrel by 2025.
Despite rising geopolitical tensions in the Middle East and between Russia and the West, prices are at their lowest in months, mainly due to ample supply and sluggish demand globally.
Front-month Brent prices LCOc1 hit a 13-month low of $102.10/barrel on Thursday, while the equivalent West Texas Intermediate contract CLc1 dropped below $96/barrel for the first time since January.
CTI said Conoco Phillips (COP.N) and Royal Dutch Shell (RDSa.L) have the most production potentially at risk from low prices, while Total (TOTF.PA) and Exxon Mobil (XOM.N) were found to have the largest percentage of their capital expenditures that are dependent on high crude prices.
CTI urged investors to ask the firms to forecast how lower prices would impact the projects and future profits.
The organisation in May said investors could spend up to $1.1 trillion over the next decade on projects that will never reach production due to new environmental rules.
Such measures could slash fossil fuel demand, lower prices and cut profits, leaving assets and investments "stranded".
(Reporting by Michael Szabo; Editing by Greg Mahlich)