‘Stranded Assets’ Risk Rising With Climate Action and $40 Oil
What had seemed like an abstract debate about leaving oil, gas and coal in the ground to fight climate change has suddenly become real. Environmental activists have long fought for lower fossil-fuel production. Now, with the pandemic crippling economies and reducing energy use and prices, drillers and miners are coming to grips with projects that are no longer viable. Some companies are even abandoning investments, leaving deposits worth billions of dollars in the ground to languish as so-called “stranded assets.” While environmentalists applaud, fund managers, banks and regulators worry that project financing could sour and collateral become worthless.
1. Who’s taking action?
The world’s biggest oil companies began to slash the value of reserves and current projects in 2020 as some fields became unprofitable to drill. Total SE wrote down about $7 billion of Canadian oil sands assets in July, while Royal Dutch Shell Plc took a $4.7 billion hit in the second quarter relating to assets in North America, Brazil and Europe and a project in Nigeria. Exxon Mobil Corp. warned in August that low energy prices may wipe as much as one-fifth of its oil and natural gas reserves off the books. Chevron Corp. said it expects to revise its reserves down about 10%, mainly in the Permian Basin straddling Texas and New Mexico, and in Australia.
2. What type of assets are at risk?
Those where production is especially costly or complicated ---including deep-water discoveries off Brazil and Angola as well as fields in the Gulf of Mexico and Arctic -- or where deposits contribute disproportionately to global warming. In Canada’s tar-like oil sands, extracting and processing generates more than twice the amount of emissions per barrel than for the average North American crude. Oil producers face a double whammy, as fossil fuels may become cheaper, while taxes make releasing carbon more expensive. BP in June cut estimates for oil and gas prices in coming decades by between 20% and 30%, while projecting that the cost of carbon emissions will more than double.
3. How much are we talking about?
There are different ways to look at it and estimates vary. About a third of the fossil-fuel investment planned through 2030 risks failing to deliver adequate returns for developers under policies that would achieve the United Nations’ target of limiting the rise in Earth’s temperature to well below 2C (3.6F) above pre-industrial levels. That’s according to Carbon Tracker Initiative, an environmental group that advises institutional investors and coined the term “stranded assets.” (The think tank has received support from the charitable foundation of Michael Bloomberg, the majority owner of Bloomberg LP, the parent of Bloomberg News.)
4. What are projections showing?
Consultants at Rystad Energy AS estimate that the pandemic could result in about 10% of the world’s recoverable oil resources, or some 125 billion barrels, becoming stranded. A separate Financial Times study in February concluded that if governments attempted to restrict the rise in temperatures to 1.5C for the rest of this century, more than 80% of hydrocarbon assets, including coal, would be worthless. Under this scenario, $900 billion, or one-third of the value of big oil and gas companies, would evaporate.
5. Are prices likely to stay low?
The jury is out on that because of the unpredictability of the pandemic. But meanwhile the writedowns continue. Energy companies were starting to review assets in the face of a decline in oil prices, irrespective of investor pressures and before the full effect of lockdowns was felt. Brent crude tumbled below $20 a barrel in April and was still trading around $40 in September, down from almost $70 in early 2020. The international benchmark has been pulled lower both by the coronavirus-led drop in usage and a price war in March involving Saudi Arabia and Russia.
6. Who’s affected by stranded assets?
Everyone. The debate about stranded assets has been pushed along by investors, stock exchanges, banks and regulators who have grappled with how companies should reflect the hazards of global warming. Investors say fossil-fuel companies need to calculate the financial risks of their climate policies and incorporate those in public strategy documents. Some investment managers are facing pressure to dump fossil-fuel companies altogether. “Every major systemic bank, the world’s largest insurers, its biggest pension funds and top asset managers are calling for the disclosure of climate-related financial risk,” former Bank of England Governor Mark Carney, who is also the United Nations Special Envoy on Climate Action and Finance, said in February.
7. Will more assets get stranded?
Maybe. Climate Action 100+, a group of more than 500 investment firms that together manage over $47 trillion in assets, called in September on some of the world’s biggest polluters to be more aggressive in reducing their greenhouse gas emissions, putting pressure on marginal assets. No new oil-sands projects fit into a world compliant with the Paris Agreement on climate change, reached under United Nations auspices in 2015, according to Carbon Tracker.
The Reference Shelf
- A Bloomberg story on how BP is walking away from the oil supermajor model it helped create, and another on Big Oil seeking profits elsewhere.
- A Financial Times Lex study on stranded assets.
- Chris Hughes of Bloomberg Opinion writes on BP submitting to “brutal reality.”
- A Bloomberg story on Big Oil looking for profits that don’t involve selling oil.
- A Chatham House study on the geopolitical implications of future oil usage.
- A BNEF analysis on “oil and gas climate risk strategy.”
- A Bank of England document on climate-related financial disclosure.
©2020 Bloomberg L.P.