http://www.carbontracker.org/wp-con...2D-of-separation_PRI-CTI_report_correct_2.pdf
This report from carbon tracker is worth discussing. They look at oil and gas projects at 69 of the largest oil and gas companies. They place these on a supply cost curve by breakeven price. From this they are able to determine the price level below which projects are consistent with a 2D (2 degree centigrade) climate scenario and above which are in excess of hitting the 2D scenario. So in a rational process none of the projects above that 2D threshold would ever get done. This is about 1/3 of capital for all projects.
What I found most interesting was the last section on NPV sensitivity to the average price of oil from 2017 to 2025. At $60/noe, the 2D compliant projects have an NPV of about $0.3T (assuming 10% diacount), while the NPV of BAU pursuit of all projects have an NPV of -$1.1T. That is, the inclusion of projects not within the 2D scenario destroy some $1.4T of value with the price of oil at $60/b (Brent). At $40/b, even the 2D consistent projects have a negative NPV, -$0.25T. For BAU to breakeven, oil needs to be at $80/b, but even here 2D compliant only has greater value than BAU, $1T vs $0.2T.
So this drives home the value of a controlled wind down of the industry. If there is a way of coordinating to avoid projects above the 2D mark, then prices need not collapse under excessive oversupply and what is left is of higher NPV even if there were no impact on prices. This seems to go a long ways toward why it is in the interest of oil companies to have the US continue to participate in the Paris aggreements.
But looking at raw economics, this report also suggests that the above 2D projects are already a loss, and pursuing them would only destroy more value for all market producers. If the average oil price remains below $60/b. This whole oil industry is just about worthless on an NPV basis. This of course is assumming that some projects with breakeven prices above $60/b are in fact pursued. But this is a verey real risk for all participants that remain in the market. A perpetual oil glut is a negative sum game. This should be sobering enough, even if climate change were a non-issue.
The positive side to this analysis is that if EVs and other means of cutting demand can keep the price of oil below $60/b, then economic forces will tend to reduce the supply to a point below a 2D scenario. While the price is below $50/b, only the most stupid players would even consider projects with a breakeven above $60/b. And the stupid will be rightly punished if prices remain below $60. The 2D threshold is about $85/b.
So this is the basic challenge for Tesla. It does not have to replace all this oil; rather, it merely needs to soften demand enough that the price of oil stays below $60/b. Eventually low oil prices will lead reductions in supply, and reductions in combustion will follow. And oddly enough, any producer that increases supply below $60/b is also helping to put a cap on oil prices, minimize malinvestment, and buying time for EVs to catch up on volume displacement.
