Monday

27th Sep 2021

Risk of 'stranded assets' from 2025, new oil report warns

  • The report indicates that a rapid change in climate change policies from 2025 could cause sharp changes in oil pricing, wiping out assumed values (Photo: stuartpilbrow)

The lack of urgency in setting new regulations to drive climate action is likely to result in a "forceful, abrupt, and disorderly" policy response from 2025 that will seriously hit the fossil-fuel industry, a new report has warned.

"We do not know when or how an inevitable policy response will come, which makes it hard for companies to plan," said Andrew Grant, senior analyst and author of the report of the financial think tank Carbon Tracker published on Friday (31 January).

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However, according to Grant, preparing in advance and the industry aligning their investments with climate targets "will deliver the highest returns for the lowest risk under any outcome".

The report urges governments to implement policies that limit new investment in fossil fuel projects to ensure a smooth transition towards sustainability, stable prices and predictable valuations.

Meanwhile, the planet is currently heading for a 3.2 degrees temperature rise by the end of this century, far above the Paris Agreement targets set in 2016 to keep global heating below 2 degrees, but aiming for 1.5 degrees.

Ahead of the UN climate summit (COP26) in Glasgow later this year, in which nations have to submit their new or updated strategies for 2030, governments are expected to present more ambitious plans to reduce their emissions.

However, Carbon Tracker's latest analysis warns companies that their future investments on oil and gas projects based on 'business as usual' government policies are likely to be in danger as tougher policies enter into force.

Oil companies "risk being left with stranded assets" assuming that governments will not take "forceful action" to limit climate change, Grant said.

However, the study indicates that a swift in climate change policies from 2025 onwards could cause sharp changes in oil pricing, wiping out the value that was assumed beforehand.

The loss of value of new projects will be mainly driven by investing based on signals sent by the oil price, what can lull investors into "a false sense of security".

Oil demand is expected to grow by 0.6 percent a year over the next five years, before a "dramatic" decline in the oil price takes place over the period 2025-2040, the analysis states.

However, the longer that price signals lead to over-investment, the more disruption fossil-fuel industry face later on when increasingly drastic measures are required.

American oil giants and European companies such as BP and Repsol are the most exposed to these risks, while Shell, Total and Eni are less exposed due to thanks to the cost profile of their latest projects, the report states.

However, Carbon Tracker's study indicates that Saudi Arabian petroleum and natural gas company Saudi Aramco is the least-exposed to financial risks related to the decline of oil prices thanks to its low-cost oil production.

"We believe that higher cost, higher risk oil companies are more likely to underperform in the energy transition, thereby carrying a greater potential to destroy shareholder value," the report states.

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