Fossil fuel companies, particularly those focused on U.S. projects, are risking up to $2.2 trillion of investments over the next 10 years by pursuing projects that may be uneconomic in the face of international action to limit climate change, the Carbon Tracker Initiative (CTI) warned Wednesday.

“The U.S. has the greatest financial exposure with $412 billion of unneeded fossil fuel projects to 2025 at risk of becoming stranded assets, followed by Canada ($220 billion), China ($179 billion), Russia ($147 billion) and Australia ($103 billion),” researchers said in the report, “The $2 trillion stranded assets danger zone: How fossil fuel firms risk destroying investor returns.”

“The biggest risk is from shale oil in the U.S., oilsands in Canada and conventional oil in Russia. All three, with Norway, are exposed to Arctic oil. Deepwater projects in the U.S. and Mexico, and Venezuela’s heavy oil, are also in the danger zone. However, OPEC conventional production faces little risk due to its low cost.”

Companies considered most at risk over the next decade because of the “demand misread to the climate and shareholders” include Royal Dutch Shell plc, ExxonMobil Corp. and Mexico’s Petroleos Mexicanos. Also impacted are the coal miners.

“Around 20-25% of oil and gas majors’ potential investment is on projects that will not be needed in a 2 degree C scenario, and canceling them would mean going ex-growth,” the report noted. There’s a “danger zone” between business-as-usual strategies and action needed to meet a United Nations (UN) commitment to limit climate change.

Among other things, no new coal mines will be needed, oil demand is going to peak around 2020 and growth in natural gas “will disappoint industry expectations.” The report maps out natural gas, oil and coal supply “that makes neither financial nor climate sense in a 2 degree C world,” for both listed and private companies.

Two years ago the International Energy Agency (IEA) said the climate was trending toward a 5.3 degree C increase, well above the 2 degree goal agreed to in 2009 by industrialized nations (see Daily GPI, June 11, 2013).

“If the industry misreads future demand by underestimating technology and policy advances, this can lead to an excess of supply and create stranded assets,” researchers said. “This is where shareholders should be concerned — if companies are committing to future production which may never generate the returns expected.“

Co-author James Leaton, head of research for CTI, said not enough energy companies yet “recognize that they will need to reduce supply of their carbon-intensive products to avoid pushing us beyond the internationally recognized carbon budget. Clean technology and climate policy are already reducing fossil fuel demand — misreading these trends will destroy shareholder value. Companies need to apply 2 degree C stress tests to their business models now.”

The report looks at production to 2035 and capital investment to 2025, warning that energy companies should avoid projects that would generate 156 billion tons of carbon dioxide (156Gt CO2) to be consistent with the carbon budget in the IEA 450 demand scenario, which sets out an energy pathway with a 50% chance of meeting the UN’s climate change target (see Daily GPI, Nov. 18).

Specifically for natural gas growth, the IEA’s 450 scenario in a 2 degree C world gas would be “at a lower level than expected under a business as usual scenario,” CTI said. Capital expenditure of $459 billion on new projects and $73 billion on existing projects is surplus to requirements. “Overall, 41% of investment in new projects and 25% of new supply, accounting for 9 Gt of CO2, is unneeded.”

The United States, Australia, Indonesia, Canada and Malaysia have the greatest exposure to natural gas development, accounting for three-quarters of investment risk.

Within the markets analyzed by CTI — North America, Europe, the liquefied natural gas (LNG) export market, two-thirds of new coalbed methane and Arctic projects — are in the danger zone while half of the supply in new LNG projects “is unneeded and very little new capacity will be needed in the U.S. and Canada in a 2 degree C scenario.”

Under the 450 scenario for oil, demand peaks around 2020, which means the oil sector “does not need to continue to grow, which is inconsistent with the narrative of many companies,” the report stated. “Spending of $1.3 trillion on new projects and $124 billion on existing projects is unneeded. Overall 43% of investment in new projects and 33% of new supply should be avoided to align with a 2 degree C scenario, avoiding 28Gt of CO2.”

CTI is a nonprofit organization composed of financial, energy and legal experts, which is “free from the commercial constraints of mainstream analysts,” allowing it to set its research agenda. Nonexecutive Chairman Jeremy Leggett, a former geologist whose research on shale was funded by BP plc and Shell, has authored several books on fossil fuel dependency. Co-founder Mark Campanele was a co-founder in investment fund Jupiter Asset Management, as well as AMP Capital and Henderson Global Investors. He also served on the World Business Council for Sustainable Development.