The Oil And Gas Industry Is Facing A $3.3 Trillion
Stranded Asset Nightmare
By Tsvetana
Paraskova - Nov 23, 2021
-
Increased scrutiny and pressure on companies from investors and
society could lead to trillions in stranded assets
-
Businesses are waiting for details on carbon markets and carbon
emission rules and, potentially, carbon taxes, before re-evaluating
their assets
-
IRENA: the value of assets stranded in the upstream fossil fuel
sector would total $3.3 trillion by 2050
The largest international oil and gas firms wrote down assets worth
$150 billion last year when prices crashed with the demand slump in
the pandemic. Despite the fact that this year's oil prices are now
nearly double compared to the 2020 average, the energy industry faces
additional impairments in the coming years and decades, this time due
to the investor pressure to slash emissions and start accounting for
changes to energy demand in the transition to low-carbon sources.
All industries are under pressure to realign their accounting and
financing practices to climate change-related risks, but none more so
than the large companies in the energy sector whose core business
continues to be oil, gas, and coal.
The increased scrutiny and pressure on companies from investors and
society, as well as uncertainties over long-term demand for fossil
fuels, could leave assets, currently estimated to be worth trillions
of U.S. dollars, stranded in the future.
Recent studies have suggested that more than half of oil and gas
reserves should remain in the ground if the world is to limit global
warming to 1.5 degrees Celsius above pre-industrial levels by 2050.
Carbon prices and additional regulations to limit carbon emissions
could make a greater number of fossil fuel assets—especially
coal—unprofitable as governments, especially in developed nations,
press for net-zero emission economies by 2050.
Businesses are waiting for details on carbon markets and carbon
emission rules and, potentially, carbon taxes, before re-evaluating
their assets, analysts tell The Wall Street Journal.
"Carbon charges are likely to come, and they will transform the
upstream sector, affecting both asset values and the industry's
economics," WoodMac analysts said earlier this year.
With carbon taxes and prices, more reserves and operations of energy
companies, not only in the upstream sector, could be left as "stranded
assets."
Energy Firms Face Trillions Of Stranded Assets By 2050
In its World Energy Transitions Outlook: 1.5°C Pathway report from
June 2021, the International Renewable Energy Agency (IRENA)
reiterated its estimates from two years ago that I
"Delaying action could cause this value to rise to an alarming USD 6.5
trillion by 2050 – almost double. Planning in advance also supports a
just transition, assisting in the reallocation and creation of jobs
and services," according to IRENA.
Last year, the biggest oil and gas firms in North America and Europe
alone wrote down over $150 billion off the value of their assets, the
highest since at least 2010 and representing around 10 percent of the
companies' combined market capitalizations, an analysis by The Wall
Street Journal showed in December. The reassessment of oil and gas
assets was so widespread that even ExxonMobil—which until last year
hadn't really adjusted the value of its assets in many years—warned of
massive write-downs of between $17 billion and $20 billion after-tax
in Q4 in its gas assets in the United States, Canada, and Argentina,
due to the pandemic and its effect on the industry. TotalEnergies even
used "stranded assets" in qualifying Canadian oil sands projects Fort
Hills and Surmont as such.
While the write-downs last year were the direct result of the collapse
in prices leading to the reduced value of assets, future impairments
would likely be driven by climate-related risks, analysts and think
tanks say.
Not all assets will pass the scrutiny to be resilient and profitable
in a world that will still need oil and gas but aims to significantly
limit energy-related emissions.
Long-Term Stranded Assets Risk
If the world's 60 largest listed oil and gas companies continue with a
business-as-usual approach, more than $1 trillion of such
business-as-usual investment is at risk, including $480 billion in
shale/tight oil projects and $240 billion in deepwater projects,
financial think tank Carbon Tracker said in a report in September.
"Companies and investors must prepare for a world of lower long-term
fossil fuel prices and a smaller oil and gas industry, and recognise
now the risk of stranded assets that this creates," Mike Coffin,
Carbon Tracker Head of Oil, Gas and Mining and report co-author, said.
According to a recent study of researchers from the University College
London, nearly 60 percent of both oil and fossil methane gas and
almost 90 percent of coal must remain in the ground by 2050 in order
to keep global warming below 1.5 degrees Celsius. The findings,
published in Nature in September, are based on a 50-percent
probability of limiting warming to 1.5 degrees Celsius this century.
This would mean that reaching this target would require an even more
rapid decline in production and more fossil fuels left in the ground,
UCL researchers say.
Still, the world will need oil and gas for decades to come. Yet, the
pressure to account for climate-related risk to assets could bring
about billions of asset impairments in the energy industry every year
and leave trillions worth of fossil fuel assets stranded.
"Just a few years ago, few within the oil and gas industry would even
countenance ideas of climate risk, peak demand, stranded assets,
liquidation business models and so on. Today, companies are building
strategies around these ideas," Luke Parker, vice president, corporate
analysis, at Wood Mackenzie said last year, commenting on the massive
write-downs at Shell and BP.
"Demand might still grow from here, and many companies are still
chasing a share of that growth. But make no mistake, the corporate
landscape is changing, and the majors are changing with it."
By Tsvetana Paraskova for Oilprice.com
More Top Reads From Oilprice.com:
·
Big Oil Is Finally Exercising
Restraint, And Biden Is Pissed
·
Biden's Bluff And Covid Cases
Drag Oil Prices Down
·
Goldman Sachs: Oil Price Plunge
Is Not Justified By Fundamentals
Green Play Ammonia™, Yielder® NFuel Energy.
Spokane, Washington. 99212
www.exactrix.com
509 995 1879 cell, Pacific.
Nathan1@greenplayammonia.com
exactrix@exactrix.com
|
