Shell has withdrawn plans to invest in the Cambo oilfield off the North Coast of Scotland. The oilfield would have produced 170 million barrels of oil over 25 years and 53.5 billion cubic feet of gas. Industry insiders have suggested that Shell’s withdrawal may signal a turning point and the end of large-scale oil and gas projects being sanctioned.
Why Did Shell Pull Out from Cambo?
Shell has been reducing its legacy assets in the UK for several years now. In 2011, the company sold its large refinery in Cheshire, and in 2017 Shell sold its North Sea assets. In 2018, Shell bought a 30% non-operator stake in the undeveloped Cambo project.
In the lead up to COP-26, the Cambo project and Shell were targets of climate activists who rightly argued that new oil and gas projects are inconsistent with the international emission reduction targets set out under the Paris agreement.
It is thought that Shell’s decision to withdraw is either due to pressure from activists or because Shell believes that the increased opposition to new oil and gas projects may pose an unacceptable financial risk. Suppose enough resistance is raised to new oil and gas projects. In that case, this could result in regulations preventing new projects or significantly reduce demand for oil and gas to the point where new projects are no longer profitable. In turn, this creates a risk of stranded assets – an asset that has suffered an unanticipated or premature devaluation or conversion to liabilities.
Will the Cambo Project Go Ahead?
Jonathan Roger, Siccar’s Chief Executive, said that “we are now in a position where the Cambo Project cannot progress on the originally planned timescale. We are pausing the development while we evaluate the next steps.” Siccar has stated that Cambo is a “robust project” and he expects it to move forward.
However, Siccar may struggle to find a new investor because Shell is one of the largest listed oil companies. Most of the smaller companies operating in the UK lack the finance to develop a project of this size. Shell’s decision has knocked the confidence of private investors in North Sea oil and gas. Indeed, Shell announced that “the economic case for investment in [Cambo] is not strong enough.”
The increase in climate awareness and climate activism has heightened the reputational costs of producing new oil and gas projects. Consequently, legacy public listed firms are reducing their exposure to off-shore oil projects, particularly in the UK. The companies are divesting from oil and transitioning towards gas and renewables.
The UK Government aims to maintain investment in oil while reducing emissions. This goal relies on receiving investment from firms with limited connection to the UK. Considering the poor economic case and reputational costs of developing the Cambo oilfield, it is likely that prospective investors will be backed by private equity or overseas state investment funds.
What Does This Mean for New Large Oil and Gas Projects Globally?
As one of the largest oil producers, Shell’s retreat from Cambo casts doubt over the future of the Cambo project and large oil projects more broadly. The International Energy Agency (IEA) has said that no new oil and gas exploration and development can be undertaken if the world stays within 1.5C of global warming, which was re-affirmed at COP-26 this year.
Further, the economic assessment conducted by Shell demonstrates that we have, or are about to, reach the turning point where large-scale oil projects may no longer be profitable.