Oil companies should think twice before investing in new projects, warns a new report from Carbon Tracker.

The report found that companies making long-term investments expecting high oil prices to continue risk wasting $970 billion in capital expenditure by 2030.

“We could see that the energy transition could accelerate very rapidly and ultimately that will drive a significant fall in demand for oil,” Mike Coffin, the report’s co-author and head of oil and gas at Carbon Tracker, told Energy Source.

Crude oil sits above $91 a barrel, up 57% from the same time last year. While Carbon Tracker expects prices to remain high in the short term, it expects oil demand and prices to fall from the mid-2020s as climate policies tighten and a shift to electric vehicles (EVs) gains speed. Oil prices would average $40/bbl after 2026.

It is a threat to companies to make investment decisions based on today’s high oil price, the group says.

“Companies may see high prices [now] as a huge neon sign pointing towards investment in more supply,” said Axel Dalman, analyst and lead author of the report. “However this could become a nightmare scenario . . . shareholders could face catastrophic levels of value destruction as prices fall.”

The report found that companies investing in costly projects with long lead times are at the greatest risk of oversupplying the market and being left with stranded assets. If oil prices fell to $40/bbl, these companies would lose $530 billion in the next 10 years and nearly $1 trillion if oil fell to $30/bbl.

Carbon Tracker picked out several megaprojects as examples, including Exxon Mobil and Shell’s $6.7 billion Bosi Field development in Nigeria that isn’t expected to deliver oil until 2029. Oil prices would have to average in the high $50s/bbl for the project to break even, Carbon Tracker said.

Nevertheless, companies can meet demand without wasting capital. By favoring quick shale projects and relying on OPEC’s spare capacity to close the supply gap, the report found companies can deliver on short-term demand and preserve shareholder value. According to Carbon Tracker, it’s in OPEC’s interest to co-operate, as high prices could otherwise spur more U.S. shale production and accelerate the transition to EVs.

“A sustained surge in the oil price is not necessary,” said Mark Fulton, co-author of the report and chair of Carbon Tracker’s research council. “The industry can both meet peak demand and manage its way through that without wasting capital by applying discipline.”

This article is an excerpt of Energy Source, a twice-weekly energy newsletter from the Financial Times.

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