Big oil faces 'monumental' costs to reach climate goals: JPMorgan

London

EUROPE'S largest oil companies must roughly double the amount of money they're now dedicating to "new energies" by the end of the decade to meet key climate targets, according to a report from JPMorgan Chase & Co that suggests the challenge facing the fossil fuel industry has been vastly underestimated.

In some cases, to achieve emission reduction goals, or protect their portfolios against future declines in oil demand, companies such as Total SA will have to raise their overall capital expenditure budgets. If the sector does double what it dedicates to clean fuels by 2020, it will still need to double it again within five years, or risk losing credibility in discussions about climate change.

Using a model built on public statements from the eight largest European oil companies and industry "best practices", the report paints a picture of a sector not fully prepared for a rapidly approaching, and enormous change. Spending more on clean fuels will help in climate discussions, but could cause them to miss oil and gas production targets or return less cash to shareholders that expect a rebound in crude prices to fatten their pockets.

"We're not really bracing ourselves enough," said Chrystian Malek, head of European, Middle East and African oil and gas research at JPMorgan, in an interview. "If they're really going to lower their carbon footprint, the dollars that they have to spend are monumental."

Mr Malek said he created the report partly to "hold their feet to the fire". Oil companies have stated goals related to cutting their own operational emissions, reducing flaring and shifting their portfolios so the products they sell emit fewer greenhouse gases. JPMorgan catalogued those targets while adding in its own forecasts for upcoming emissions rules globally to determine how much companies should spend.

The largest European oil companies spend about 5 per cent of their capital expenditure budgets on "new energies" - low carbon energy fuels and systems. That needs to rise to 9 per cent by 2020 and then 17 per cent by 2025, according to the analysis. The largest company in the study, Royal Dutch Shell Plc, will more than double its spending on clean fuels in 2025 to US$4.5 billion a year. That's up from US$1 billion to US$2 billion now, the report said.

For some companies, such as Shell, that's affordable. The Anglo-Dutch oil major will have a US$27 billion capital expenditure budget for all energy in 2025, and can afford to reduce what it dedicates to traditional fossil fuels in favour of low-carbon investments. Spain's Repsol SA, which already dedicates 15 per cent of its capital expenditure budget to new energies, and Norway's Equinor ASA are also relatively well-placed to face the change.

Other companies, such as Total, aren't able to spend less on oil and gas without missing production growth targets. The French oil major will have to roughly quintuple new energy spending to US$2.8 billion by 2025, but can't afford to cut its spending on traditional fuels. It will need to raise total spending in order to keep all its promises, which could hurt shareholder returns.

Both Total and Shell declined to comment.

The scope of the challenge - and the difficulty of quantifying it - may factor into why shares of the largest oil companies haven't rebounded along with a surge in crude prices. The Stoxx Europe 600 Oil & Price Index is up 7.5 per cent so far this year versus a 17 per cent rise in Brent crude.

The industry is set to deliver record cash flows, can meet its production targets within its existing capital framework and has kept a tight leash on spending. But the chorus of critics arguing against fossil fuel use is growing stronger, which means it's unlikely the biggest oil companies will still be able to acknowledge climate change without dedicating enough capital to address it, Mr Malek said.

"They could kick the can down the road; they could all possibly do that," said Mr Malek. But "customers are breathing down their necks, and when they're walking to investor meetings, I think it's now a real problem". BLOOMBERG