New research released today (13 April 2022) by the Investor Group on Climate Change (IGCC), whose members hold more than AU$33 trillion in global AUM, highlights tough questions for new Australian gas projects.IGCC’s new research shows that under 1.5°C, Paris-aligned climate scenarios, new Australian gas projects may be economically challenged, and investors are likely to be cautious of capital expenditure in the sector.
The new report, Changing Pathways for Australian Gas: A 1.5°C scenario analysis of new Australian gas projects, is based on modelling by leading global energy consultancy Wood Mackenzie.
The report also reflects significant input from IGCC’s members, including Australia’s largest superannuation funds and retail fund managers, who invest on behalf of more than 7.5 million Australians.
The report tests the cashflow resilience of proposed and recently sanctioned Australian gas projects, including Woodside’s Scarborough, under two credible 1.5°C-aligned pathways.
The modelling found weaker returns for Australian gas projects where they had high capital expenditure requirements, challenging geographies, and overall higher costs compared to international producers.
Projects serving the export market were more challenged than domestic gas projects, a significant finding given three quarters of Australian gas is exported. In particular, LNG projects with scheduled production past the 2040s are likely to face a rapid decline in offshore demand.
Some projects may struggle to maintain positive cash flow after 2030 and face a higher risk of becoming stranded assets, according to the scenario analysis.
The research shows that new gas projects face a risky future that is ultimately dependent on the pace of change for policy and technology.
The most recent IPCC report showed that gas supply would contribute to dangerous emissions levels and that global emissions must peak and begin to rapidly decline in the next few years, which may be an additional risk factor for new gas projects, and for the overall stability of the economic systems that underpin investors’ portfolios.
Quotes from Rebecca Mikula Wright – CEO, Investor Group on Climate Change
“This modelling clearly points to a range of complex and interconnected risks that new gas projects face, and investors will be concerned about this.
“Overall, investors want to understand how Australian gas companies are assessing the risks associated with new projects, in particular the risk of accelerated demand decline as the world shifts to net-zero.
“As an industry, gas companies need to develop and implement business strategies that will enable them to thrive in a zero-carbon world, and they need to do that now.
“As a country, we need to be part of a net-zero emissions future by embracing a transition that is efficient, economically sensible, and favours renewable energy sources over fossil fuels.”
Background on the report’s 1.5° scenarios
The Glasgow Climate Pact, adopted by all 192 nations that are signatories to the Paris Agreement, reaffirmed support for achieving emission reduction targets consistent with 1.5°C of warming.
The Glasgow Financial Alliance for Net Zero, which has 450 global financial sector members representing over US$130 trillion, and is a reasonable proxy for mainstream economic orthodoxy, requires net zero or carbon neutrality by 2050, and is consistent with a 1.5°C scenario.
The Australian energy market regulator, AEMO, uses a 1.5°C-aligned scenario as its baseline model.
The IPCC Working Group II & III reports, released in February and April respectively, showed that limiting global heating to 1.5° with little or no overshoot gives us the greatest chance of avoiding catastrophic climate outcomes. Each increase above that level considerably increases risk to the safety and stability of many of the earth’s environmental, social and economic systems.
For further enquiries, to arrange an interview or background briefing with the report’s authors, contact:
Director of Media and Communications
Investor Group on Climate Change
+61 (0) 476 101 542