carbon supply cost curves: evaluating financial risk to oil capital

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Initiative arbon Tracker Carbon supply cost curves: Û>Õ>Ì} w>V> ÀÃ Ì oil capital expenditures

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Page 1: Carbon supply cost curves: Evaluating financial risk to oil capital

Initiativearbon Tracker

Carbon supply cost curves: Û>�Õ>Ì��}�w�>�V�>��À�Ã��Ì�� oil capital expenditures

Page 2: Carbon supply cost curves: Evaluating financial risk to oil capital

About Carbon Tracker6JG�%CTDQP�6TCEMGT�+PKVKCVKXG�%6+��KU�C�VGCO�QH�ƂPCPEKCN�URGEKCNKUVU�OCMKPI�ENKOCVG�TKUM�TGCN�KP�VQFC[oU�ƂPCPEKCN�markets.

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Contact

James Leaton Research Director LNGCVQP"ECTDQPVTCEMGT�QTI YYY�ECTDQPVTCEMGT�QTI VYKVVGT��"ECTDQPDWDDNG

Team Members

Jeremy Leggett� Chairman

Mark Campanale� (QWPFGT�CPF�'ZGEWVKXG�&KTGEVQT

Anthony Hobley� %JKGH�'ZGEWVKXG�1HƂEGT

James Leaton� Research Director

Luke Sussams� Senior Researcher

John Wunderlin��0QTVJ�#OGTKEC�5VCHH�#VVQTPG[

Reid Capalino� (KPCPEKCN�#PCN[UV

Margherita Gagliardi� %QOOWPKECVKQPU�1HƂEGT

Tracy Trainor� 1HƂEG�/CPCIGT

Jon Grayson� %JKGH�1RGTCVKPI�1HƂEGT

Acknowledgments

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Page 3: Carbon supply cost curves: Evaluating financial risk to oil capital

Contents'ZGEWVKXG�5WOOCT[

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1. Introduction

2. Demand, price and capex

3. Higher risk operations

4. Geographical distribution across provinces

5. Company exposure

6. Conclusions and Recommendations

5

7

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Page 4: Carbon supply cost curves: Evaluating financial risk to oil capital

US$/

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Breakeven BrentOil Production (MBPD average)

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Understand exposure on the carbon supply cost curve

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The private sector plays a key role

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Majors can enhance value

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Independents are gambling on a high oil price

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Oil sands, Arctic and Deepwater

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Page 5: Carbon supply cost curves: Evaluating financial risk to oil capital

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Recommendations for investors

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Page 6: Carbon supply cost curves: Evaluating financial risk to oil capital

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Page 7: Carbon supply cost curves: Evaluating financial risk to oil capital

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Anthony Hobley

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Page 8: Carbon supply cost curves: Evaluating financial risk to oil capital

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Page 9: Carbon supply cost curves: Evaluating financial risk to oil capital

1. Introduction

Investors engaging

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To spend or not to spend

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Risk factors

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Creating value for shareholders

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A focus on capital discipline is therefore seen as prudent by many sector analysts.

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Page 10: Carbon supply cost curves: Evaluating financial risk to oil capital

2. Demand, price and capex

Demand scenarios

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Figure 1: Oil demand scenarios

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Page 11: Carbon supply cost curves: Evaluating financial risk to oil capital

Bridging cost and carbon Markets allocating the carbon budget

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Competition between fossil fuels

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Carbon Supply Cost Curves

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Oil price sensitivity

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Degrees of warming

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This 360GtCO2 budget of cumulative emissions intersects with the supply cost curve at around the $60 break even oil price.

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Page 12: Carbon supply cost curves: Evaluating financial risk to oil capital

0

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Figure 2: Carbon cost curve of oil production

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Page 13: Carbon supply cost curves: Evaluating financial risk to oil capital

Risk analysis

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Ownership of potential production to 2050

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It is unsustainable for many companies to maintain both capex and dividends unless the oil price continues to rise.

Private companies are responsible for over half of potential production.

Oil price assumptions

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Rising costs

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Page 14: Carbon supply cost curves: Evaluating financial risk to oil capital

0

100

200

300

400

Above $150

$120–150

$100–120

$80–100

$60–80

$0–60

GtCO

2

Oil p

rodu

ctio

n (m

bpd)

Part-listed

2

1

4

14

19

43

NOCs

5

4

12

28

39

215

Private

42

27

24

42

70

125

Majors

1

2

4

10

21

46

OPEC

8

9

7

17

22

189

20

40

60

0

Exposure to the low end of the cost curve

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Notes

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Figure 3: Breakeven price bands of production by ownership type

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Page 15: Carbon supply cost curves: Evaluating financial risk to oil capital

3. Higher risk operations

Different types of oil

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A. Operational challenges

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B. Unconventional oil types

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Notes

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0

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$100–120

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6.7

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1.9

5.1

5.8

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0.2

0.2

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17.3

21.9

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0.2

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0.7

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Conventional Arctic Deepwater only

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Tight liquids

Figure 4: Breakeven prices of carbon production by oil type 2014–2050

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Page 16: Carbon supply cost curves: Evaluating financial risk to oil capital

Figure 5: Breakeven price band split by oil type 2012–2050

Private sector exposure

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0

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Private $120–150

Private ($100–200)

Private $80–100

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Page 17: Carbon supply cost curves: Evaluating financial risk to oil capital

4. Geographical distribution across provinces

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Page 18: Carbon supply cost curves: Evaluating financial risk to oil capital

Alberta, CA

Gulf Coast, US

Gulf of Mexico deepwater, US

Rio de Janeiro, BR

Western Siberia, RU

Atlantic Ocean, AO

Caspian Sea, KZ

Antsiranana, MG

Barents Sea, NO

Neuquen, AR

Anzoategui, VE

Alaska, US

Newfoundland and Labrador, CA

Atlantic Ocean, BR

South Russia, RU

North Sea, NO

Northwest Territories, CA

North Sea, DK

Ahmadi, KW

Atlantic Ocean, GB

Atlantic Ocean, NG

Gulf of Mexico, MX

CAPEX (USD $bn)Conventional Arctic Deepwater Ultra Deepwater

Shale Oil Oil Sands Tight Liquids

0 50 100 150 200 250 300 350 400 450

Extra Heavy Oil

Geography of potential capex

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Page 19: Carbon supply cost curves: Evaluating financial risk to oil capital

5. Company exposure

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State-owned

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Majors’ exposure

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Page 20: Carbon supply cost curves: Evaluating financial risk to oil capital

Figure 11: DeepwaterCapex

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Page 21: Carbon supply cost curves: Evaluating financial risk to oil capital

Absolute exposure

(KIWTG����DGNQY�UJQYU�VJG�EQORCPKGU�YKVJ�VJG�NCTIGUV�GZRQUWTG�VQ�CNN�QH�VJG�IGQITCRJKECN��EQUV�CPF�QKN�V[RG�ETKVGTKC�YG�JCXG�CRRNKGF�VQ�KFGPVKH[�JKIJGT�TKUM�RTQLGEVU��(KTUV�VJKU�KU�TGRTGUGPVGF�KP�CDUQNWVG�VGTOU�

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Relative exposure

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Cutting the capex to the upper end of the cost curve could be a positive process rather than a painful one.

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Page 22: Carbon supply cost curves: Evaluating financial risk to oil capital

our analysis are as follows:

Capex (2014–2025) US$million

Company Conventional Arctic Deep Water

Ultra Deep Water Shale Oil Oil Sands Extra

HeavyTight

LiquidsHigh cost/risk total

Total company capex

Petrobras 26 79,336 4,089 83,452 454,317

ExxonMobil 1,736 3,944 22,307 20,066 2,286 18,075 5 4,927 73,346 290,012

Rosneft 69,009 456 129 92 69,686 264,661

Shell 49 152 20,254 15,869 1,169 25,898 63,392 314,551

Total 58 50 17,188 26,909 11,987 56,193 197,674

Chevron 3,062 4,942 20,095 12,857 7,435 7,384 55,774 247,093

BP 228 6,546 11,039 24,223 3,978 46,014 253,066

Gazprom 44,214 420 9 81 44,724 111,881

Statoil 2 22,432 8,329 22 7,848 38,634 218,578

CNRL 2 1 38,507 45 38,555 74,917

Eni 48 3,768 11,481 11,412 78 9,448 36,235 173,426

Saudi Aramco 35,582 35,582 402,509

Suncor Energy 114 3,142 20 31,402 2 34,679 70,995

Lukoil 28,997 9 29,006 132,497

Cenovus Energy 244 25,650 2,961 28,855 46,805

OGX Petroleo e Gas 21,117 2,340 4,681 28,138 30,839

ConocoPhillips 1,432 6,679 5,833 9,054 939 2,212 26,150 140,085

BG 115 5 2,001 23,147 25,267 55,775

Athabasca Oil Sands 23,634 65 23,698 26,498

Repsol 1,223 90 2,166 15,601 19,079 47,030

20 | Carbon Tracker 2014: Oil

7

Page 23: Carbon supply cost curves: Evaluating financial risk to oil capital

Figure 14: The following companies have the largest exposure where 50% or over of the total capex is in these categories and RTQXKPEGU�CDQXG����$'12�

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Company Conventional Arctic Deep Water

Ultra Deep Water Shale Oil Oil Sands Extra

HeavyTight

Liquids

Total high cost/high

risk

%age high cost/high risk

capex

CNRL �� �� ������� ��� ������� ���

Cenovus Energy ���� ������� ������ ������� ���

OGX Petroleo e Gas ������� ������ ������ ������� ���

Athabasca Oil Sands Corp ������� 65 ������� ���

Laricina Energy ������� ������� ���

Teck Resources Limited ������� ������� ����

MEG Energy ������� ������� ���

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Denbury Resources ������ ������ ���

Queiroz Galvao E&P ���� ������ ������ ������ ����

Sunshine Oil Sands ������ ������ ���

Barra Energia ������ ������ ������ ����

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Paramount Resources ��� ������ 8 ������ ���

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Page 24: Carbon supply cost curves: Evaluating financial risk to oil capital

Demand• +PFWUVT[�FGOCPF�RTQLGEVKQPU�QHVGP�CUUWOG�DWUKPGUU�CU�WUWCN��CPF�FQ�PQV�V[RKECNN[�CNNQY�HQT�UKIPKƂECPV�EJCPIGU�KP�EQUVU��EQORGVKVKQP��GHƂEKGPE[�QT�GOKUUKQPU�EQPUVTCKPVU��6JGTG�CTG�C�TCPIG�QH�RQVGPVKCN�GPGTI[�CPF�GOKUUKQPU�UEGPCTKQU�DGVYGGP�VYQ�CPF�UKZ�FGITGGU�QH�YCTOKPI�VJCV�PGGF�VQ�DG�EQPUKFGTGF��

• 6JG�CUUWORVKQPU�WPFGTN[KPI�FGOCPF�HWVWTGU�PGGF�VQ�DG�UVTGUU�VGUVGF��(QT�GZCORNG�%JKPGUG�GEQPQOKE�ITQYVJ�KU�CNTGCF[�HCNNKPI�UJQTV�QH�VJG�TCVGU�VJCV�CTG�DWKNV�KPVQ�OCP[�GPGTI[�FGOCPF�OQFGNU��7UKPI�FGOCPF�OQFGNU�VQ�LWUVKH[�ECRGZ�PGGFU�ITGCVGT�UETWVKP[�CPF�FGDCVG�

• %QORCPKGU�EQWNF�RTQXKFG�UVTGUU�VGUV�ƂPFKPIU�WUKPI�C�TCPIG�QH�QKN�RTKEGU�YKVJQWV�IKXKPI�URGEKƂE�RTQLGEV�KPHQTOCVKQP��6JKU�CPCN[UKU�EQWNF�TGƃGEV�VJG�TCPIG�QH�QKN�RTKEGU�GZRGTKGPEGF�KP�VJG�RTGXKQWU�FGECFG�

6. Conclusions and Recommendations

Bridging carbon and cost• (QUUKN�HWGNU�CTG�TGCNKUKPI�VJCV�VJG[�CTG�KPETGCUKPIN[�EQORGVKPI�HQT�C�ƂPKVG�ECTDQP�DWFIGV��9G�JCXG�EJQKEGU�CDQWV�WUKPI�KV�HQT�DWTPKPI�EQCN��QKN�QT�ICU��6JG�VQVCN�RQVGPVKCN�RTQFWEVKQP�KP�VJG�4[UVCF�7%WDG�FCVCDCUG�QH�CTQWPF�����VTKNNKQP�DCTTGNU�QH�QKN�RTQFWEVKQP��GSWKXCNGPV�VQ����)V%1�.

• #U�C�TGHGTGPEG�RQKPV��C�VQVCN�HQUUKN�HWGNU�DWFIGV�VQ�IKXG�CP�����EJCPEG�QH�VJG��&5��KU�CTQWPF����)V%1� VQ�������$CUGF�QP�VJG�EWTTGPV�UJCTG�QH�GPGTI[�GOKUUKQPU��VJKU�VTCPUNCVGU�VQ�����QT����)V%1� for QKN��6JG�ECTDQP�UWRRN[�EQUV�EWTXG�HQT�QKN�UJQYU�OCTIKPCN�RTQFWEVKQP�CDQXG�����$'12�����OCTMGV�RTKEG�TGSWKTGF��VCMGU�WU�QXGT�VJKU���%�UEGPCTKQ�ECTDQP�DWFIGV��

• 9G�JCXG�KFGPVKƂGF�C�OCTIKPCN�RTKEG�DCPF�DGVYGGP�VJG�����$'12��&5�KPVGTXGPVKQP�CPF�YJGTG�GEQPQOKE�XWNPGTCDKNKV[�KU�CNTGCF[�XKUKDNG�CV�����$'12��5QOG�QH�VJKU����s���OC[�IGV�FGXGNQRGF�GXGP�KP�C��&5�CU�RQNKVKECN�HCEVQTU�CPF�GPGTI[�UGEWTKV[�EQPEGTPU�OGCP�VJCV�VJG�RWTG�EQUV�NQIKE�QH�VJG�EQUV�EWTXG�FQGU�PQV�RNC[�QWV��9G�VJGTGHQTG�FGEKFGF�VQ�HQEWU�QP�RQVGPVKCN�RTQFWEVKQP�CDQXG�����DTGCMGXGP�YJGTG�GEQPQOKE�CPF�ENKOCVG�TKUM�ENGCTN[�QXGTNCRRGF�

Private sector has a major role• %QORNGVGN[�RTKXCVG�UGEVQT�EQORCPKGU�JCXG�����QH�VJG�RQVGPVKCN�RTQFWEVKQP�VQ�������YKVJ�RCTV�UVCVG�RCTV�NKUVGF�EQORCPKGU�QYPKPI������6JKU�NGCXGU�����KP�VJG�JCPFU�QH�RWTGN[�UVCVG�QYPGF�GPVKVKGU��6JG�RTKXCVG�UGEVQT�JCU�C�OQTG�UKIPKƂECPV�TQNG�KP�VJG�HWVWTG�QH�QKN�RTQFWEVKQP�VJCP�UKORNG�TGUGTXGU�FCVC�OC[�UWIIGUV�

• 6JKU�KU�GURGEKCNN[�VJG�ECUG�YJGP�HQEWUKPI�CV�VJG�VQR�JCNH�QH�VJG�EQUV�EWTXG��9JQNN[�RTKXCVG�UGEVQT�EQORCPKGU�JCXG�

• ����QH�VJG�����)V%1��QH�RTQFWEVKQP�YKVJ�C�$'12�QXGT���������$TGPV�

• ����QH�VJG����)V%1��QH�RTQFWEVKQP�KP�VJG�OCTIKPCN��������$'12�TCPIG��������$TGPV�

• ����QH�VJG����)V%1��QH�RTQFWEVKQP�YKVJ�WPFGT�����$'12�����$TGPV�

Type of production• 6JGTG�KU�ECRGZ�QH�����VTP�VQ������GCTOCTMGF�HQT�&GGRYCVGT�CPF�#TEVKE�RTQFWEVKQP�TGSWKTKPI�C�$'12�CDQXG�����$TGPV������YJKEJ�YKNN�ECTT[�CFFKVKQPCN�VGEJPKECN�CPF�TGRWVCVKQPCN�TKUM��CU�YGNN�CU�C�HWTVJGT�����VTP�VQ������QH�RQVGPVKCN�ECRGZ�KP�QVJGT�EQPXGPVKQPCN�RTQLGEVU�KP�VJKU�EQUV�TCPIG��6JGUG�RTQLGEVU�FQ�PQV�OCMG�GEQPQOKE�UGPUG�CPF�EQPƂTOCVKQP�KU�PGGFGF�VJCV�VJG[�YKNN�PQV�RTQEGGF�WPFGT�VJG�DCPPGT�QH�TGRNCEKPI�XQNWOGU�

• +P�VGTOU�QH�WPEQPXGPVKQPCN�QKN�V[RGU��VJG�NCTIGUV�RQVGPVKCN�RTQFWEVKQP�VQ������UKVU�KP�VJG�QKN�UCPFU������VTP�QH�ECRGZ���YKVJ�C�HWTVJGT�����VTP�HQT�GZVTC�JGCX[�QKN��UJCNG�QKN�CPF�VKIJV�NKSWKFU�EQODKPGF�

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Page 25: Carbon supply cost curves: Evaluating financial risk to oil capital

Geographic distribution• 6JG�CPCN[UKU�KPFKECVGU�VJCV�����QH�VJG�RQVGPVKCN�VQ�RQVGPVKCN�JKIJ�EQUV�ECRGZ�KU�EQPEGPVTCVGF�KP����RTQXKPEGU��6JGUG�CTG�NQECVGF�KP�%CPCFC��75��$TC\KN��4WUUKC��VJG�#VNCPVKE�1EGCP��-C\CMJUVCP��/CFCICUECT��0QTYC[�CPF�#TIGPVKPC�

• 6JG�FCVC�TGƃGEVU�VJG�VTGPF�VJCV�VJGTG�CTG�NKOKVGF�QRRQTVWPKVKGU�VQ�FKUEQXGT�NCTIG�PGY�EQPXGPVKQPCN�ƂGNFU�VJCV�FQ�PQV�KPXQNXG�FGGRYCVGT�QT�#TEVKE��5QOG�TGIKQPU�JCXG�CNUQ�CRRGCTGF�TGEGPVN[�CU�HWTVJGT�GORJCUKU�JCU�DGGP�RNCEGF�QP�WPEQPXGPVKQPCNU�VQ�OCKPVCKP�RTQFWEVKQP�

• 6JG�QKN�UCPFU�QH�#NDGTVC�TGOCKP�VJG�RTKOG�ECPFKFCVG�HQT�CXQKFKPI�JKIJ�EQUV�RTQLGEVU��6JG�KUQNCVGF�PCVWTG�QH�VJG�OCTMGV�YKVJ�WPEGTVCKPV[�QXGT�GZRQTV�TQWVGU�CPF�EQUV�KPƃCVKQP�DTKPIU�TKUM��

Company exposure• 6JG�NCTIGUV�EQORCPKGU�JCXG�NCTIG�CDUQNWVG�GZRQUWTG�VQ�JKIJ�EQUV�RTQLGEVU��DWV�VJKU�KU�QHHUGV�VQ�XCT[KPI�FGITGGU�D[�GZRQUWTG�NQYGT�FQYP�VJG�EQUV�EWTXG��

• 6JGTG�CTG�QRRQTVWPKVKGU�HQT�VJG�OCLQTU�VQ�TGFWEG�VJGKT�GZRQUWTG�VQ�VJG�WRRGT�GPF�QH�VJG�EQUV�EWTXG�CPF�KORTQXG�XCNWG�TCVJGT�VJCP�EJCUG�XQNWOG�

• 6JGTG�CTG�UQOG�UOCNNGT�EQORCPKGU�YJQ�CRRGCT�JKIJ�WR�VJG�NGCIWG�VCDNGU�TGNCVKXG�VQ�VJGKT�UK\G��6JKU�UWIIGUVU�VJG[�OC[�JCXG�JKIJ�GZRQUWTG�VQ�RCTVKEWNCT�JKIJ�EQUV�TKUM�TGIKQPU�QT�V[RGU�QH�QKN��

• %QORCPKGU�YKVJ�C�JKIJ�RTQRQTVKQP�QH�HWVWTG�ECRGZ�QRRQTVWPKVKGU�CUUQEKCVGF�YKVJ�RQVGPVKCN�RTQFWEVKQP�HTQO�VJG�WRRGT�GPF�QH�VJG�EQUV�EWTXG�CTG�GZRQUGF�VQ�EQUV�KPETGCUGU�CPF�RTKEG�HCNNU��5OCNNGT�QRGTCVQTU�OC[�PQV�JCXG�VJG�ƂPCPEKCN�UVTGPIVJ�VQ�VQNGTCVG�NQYGT�FGOCPF�RTKEG�UEGPCTKQU�

• 5QOG�EQORCPKGU�OC[�UVTWIING�VQ�OCKPVCKP�ECRGZ�CPF�FKXKFGPFU�IQKPI�HQTYCTF��+FGPVKH[KPI�CTGCU�QH�RQVGPVKCN�YCUVGF�ECRKVCN�PQY�YKNN�RTGXGPV�HWVWTG�RTQDNGOU��

• 9G�JCXG�KFGPVKƂGF�����VTKNNKQP�QH�ECRGZ�QWV�VQ������KP�JKIJGT�EQUV�RTQLGEVU�TGSWKTKPI�QXGT�����OCTMGV�RTKEG��YJKEJ�YG�DGNKGXG�UJQWNF�DG�VJG�HQEWU�QH�KPXGUVQT�GPICIGOGPV�

Recommendations for investors

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Page 26: Carbon supply cost curves: Evaluating financial risk to oil capital
Page 27: Carbon supply cost curves: Evaluating financial risk to oil capital

Technical Analysis

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References

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Page 28: Carbon supply cost curves: Evaluating financial risk to oil capital

For further information about Carbon Tracker RNGCUG�XKUKV�QWT�YGDUKVG

www.carbontracker.org

For further information about Carbon Tracker RNGCUG�XKUKV�QWT�YGDUKVG

www.carbontracker.org