New analysis from Carbon Tracker warns UK government financing for upstream oil and gas projects in Brazil and Ghana is 'failing the Paris test'
Carbon Tracker has today published an analysis of UK Export Finance's (UKEF) support for oil and gas projects in Brazil and Ghana, which concludes the assets are "highly likely to become stranded" if the world honours the commitments made in the Paris Agreement.
The influential think tank undertook an analysis of two upstream projects that were supported by the UKEF following an inquiry last year by the Parliamentary Environmental Audit Committee (EAC), which highlighted how the government agency was funding fossil fuel projects around the world even as the UK remained committed to delivering net zero emissions and complying with the goals of the Paris Agreement.
Carbon Tracker applied its methodology for assessing whether projects are at risk of becoming stranded assets in the event the world meets the Paris goal of keeping temperatures 'well below' 2C to two deals: UKEF's direct loan and loan guarantee to the Offshore Cape Three Points (OCTP) project in Ghana, which was approved in 2017 with a maximum liability of $380m; and the line of credit extended to Petrobras for exploration and production in the Campos, Santos and Espirito Santos basins of Brazil, which was approved in 2018 and has a maximum liability of £248m in 2018-19 leading to a cumulative annual exposure to Petrobras since the 2011/12 financial year is £2.2bn.
The report assesses the projects against likely oil demand under two scenarios from the International Energy Agency (IEA) that map out a decarbonisation path for the global energy industry that is compatible with the Paris Agreement.
It concludes that both projects are likely to deliver oil at a relatively high cost and as such there is a "high risk" that they may fail to deliver adequate returns in a low-carbon world based on typical project costs.
"When some UK government institutions are acting decisively to prevent climate change, yet at the same time, UKEF are helping finance projects that rely on continued fossil fuel growth, it may create the perception that the right hand doesn't know what the left is doing," said Carbon Tracker's Head of Oil and Gas Andrew Grant. "At a pivotal time in setting the decarbonisation pathway for the coming decades, those looking to the UK for leadership will want to see a joined-up approach."
His comments were echoed by Philip Dunne, chair of the EAC, who argued the report underscored the Committee's conclusions that most of UKEF's investment in fossil fuel projects "undermined the UK's climate commitments, and risked trapping low and middle-income countries into high-carbon dependency".
"These projects are already hard to justify, and if the new post pandemic economic model results in a permanently lower oil price trajectory, it will make such investments look very poor value for British taxpayers compared with renewable alternatives," he added. "As we move towards a low-carbon world, the UK - as environmental leaders - cannot be supporting these projects and UK Export Finance must adapt its business model to support UK renewable technologies to help developing countries meet their energy needs for the future."
Green MP and EAC member Caroline Lucas warned that the government's funding for overseas fossil fuel projects risked undermining its credibility ahead of the crucial COP26 Climate Summit, which is due to be hosted in Glasgow next year.
"How the prime minister can continue to claim climate leadership when his government is using public money to fund fossil fuel projects overseas just beggars belief," she said. "The fact that these projects are liable to become stranded assets just makes it even worse. Funding fossil fuel development in this way isn't just hypocritical, it's a waste of public money too."
UKEF was considering a request for comment at the time of going to press. However, a report in the Guardian this morning suggests that the government may be considering a change of policy. According to the newspaper, senior civil servants are understood to be drawing up a new climate strategy that would phase out financial support for oil and gas infrastructure in developing countries ahead of the COP26 climate conference in November 2021.
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