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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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Billions In Worthless Assets Plague The Oil & Gas Industry

Investors, pension funds and companies need to get ahead of the financial risk from climate change, as many fossil fuel assets risk becoming worthless.

“We can’t have a financial sector that ignores an issue, and then all of a sudden has to deal with it,” Mark Carney, the outgoing Governor of the Bank of England, said in a recent interview with BBC. Carney is referring to the fact that current plans by fossil fuel companies, and investors who own assets in those companies, are to continue on a path that puts the world on a trajectory of 3.7-3.8 degrees of warming, “far above the 1.5 degrees that governments say they want and that people are demanding.”

Government action to limit emissions, however, would obviously disrupt that trajectory. As a result, the valuation of so many assets will remain at a certain level, until all of a sudden there is a massive repricing of companies and entire sectors. “How many of those assets that exist today are actually going to be stranded?”

Carney has lamented that the predicament amounts to a “tragedy of the horizon,” which refers to the fact that the problem of climate change is a long-term one, which makes it difficult to convince investors and companies to act. The problem is, once the real-world climate problem becomes impossible to ignore, there will be draconian policies put in place. And, in financial terms, once it becomes impossible to ignore, a sharp loss in value becomes impossible to avoid. Related: The Biggest Wild Card In 2020 Oil Markets

That’s exactly why he is urging investors to get ahead of this issue. That means pension funds, banks and many other financial institutions need to put limits on their fossil fuel investments, and also to disclose more information about their exposure. Carney will soon be taking on a role of UN special envoy for climate action and finance. He has been sounding the alarm about stranded assets and the financial risk of climate change for years.

“A question for every company, every financial institution, is ‘what’s your plan?’” Carney said. “If there is no action, we will be in a climate emergency.” Every pension fund and investor needs to justify their stakes in fossil fuels, he said.

Carney will try to tighten up international standards ahead of the Glasgow climate talks later this year.

The rising focus on the financial sector and investors presents another threat to oil and gas companies. But companies are vulnerable in different ways. U.S. shale drilling, for example, may not be all that exposed to this financial bubble. The bulk of a shale well’s production occurs in just a few years, allowing them to dodge the government restrictions and demand risk that likely lie in the future. That’s not to say that shale is not littered with its own set of financial problems, but the problem of stranded assets is a deeper problem for long-lived oil and gas projects. Related: Oil Jumps Again As Middle East Tensions Escalate

That includes Canada’s oil sands, LNG, offshore oil drilling and pipeline projects. “Mark Carney is a thoughtful person so I want to listen closely to what he has to say,” Michael Tims, vice-chairman of Calgary-based Matco Investments, told the Financial Post. “The harder part is to try to rationally assess what the implications are to value for longer-horizon projects.”

These projects are based on the assumption that they will stick around for decades. The problem is that many of them are unviable in a world that gets serious about climate change. So, either the world blows past climate targets and hurtles toward catastrophe, or governments crack down on oil and gas, upending assets currently worth hundreds of billions of dollars.

By Nick Cunningham of Oilprice.com

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  • Mamdouh Salameh on January 08 2020 said:
    Despite increased investor pressure to start addressing climate change risks and set emission-reduction targets, the global oil industry will only move away from oil and gas when this makes commercial sense.

    Therefore, oil and gas will continue to be the core business of the global oil and gas industry well into the foreseeable future.

    Still, the oil industry does invest in clean energy solutions and has accelerated such investments in recent years partly to be genuinely involved in the clean energy solutions.

    For energy transition to accelerate, it should have three realistic objectives: benefit to users, practicability and financial returns from renewables at least comparable to those from oil and gas.

    Still, decision-makers, environmentalists and futurists may have to accept the notion that there will neither be a post-oil era nor an imminent energy transition or a peak oil demand throughout the 21st century and probably far beyond.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • naveen sreedevan shitijibes unilever on January 09 2020 said:
    while prof slameh is giving valid arguments of the growing scandlas in this sector and always trying to impress on the generla public one thing -how these big businesses ar looting moeny.

    the' theory of relativity' as it applies ot welaht and progess is as follows -the rich will not feel rich if all are making money. So rich and progress is 'relative.'

    thereofre it should now be clear what all this news means. it is a cover up. these barbarians( ibg oil) and theeir consultnats are having parties at 7 star hotels all ni the name of discussing 'tight oil'
    . they are going afer 'tight asses' -irrespective pf gender iin significant case, from asia/europe. that is all. that is wht they fool the public with all controbversies, market crash.

    man more crahs is coming our way. as market is contorlled b yporn star -investment banker
    (straigth to hell, good book to leanr about this. available on amazon kindle, nook, kobo etc)
    )


    clinton foundation is a classic example CGI? s ex racket legalised.
  • Bob Forbes on January 09 2020 said:
    So, at the moment, there is nothing which can do the job of oil. Most electricity grids are powered by fossil fuel as renewables either don’t exist in some places or where they do, they meet only a fraction of a percentage of peak demand, as long as the wind blows or the sun shines. China and India consume oil more than ever and both economies are set to grow significantly this decade. Oil will still be our main source of energy in 100 years time and underlying fundamentals are stronger than they have ever been.
  • Tony Huisman on January 09 2020 said:
    I believe we need to reduce our reliance on fossil fuels and hopefully one day as soon as practical use very limited amounts . The pressure from the greenies on this is good in one sense to encourage change as quickly as possible but it has to transition both for technological advances to become commercially practical ( eg : ITER / fusion power ) and for economies to adapt . I think the market and the majority will dictate this , As for the Australian bush fires on a recent trip from Brisbane to Melbourne and back , down the inland and up the coast road it is obvious to me that the fuel hazard reduction burning has been minimal or non existent particularly in national parks and forest areas . Authorities need to rethink strategies for much more aggressive and larger controlled winter burning to greatly reducing these wild fire events . Maybe they could employ Aboriginal rangers from northern Australia to assist ? Also better council controls on housing being built in the middle of these forest areas would make sense after our history of these events occurring for decades .
  • Anthony Okrongly on January 13 2020 said:
    The premise is funny to me... Governments are going to "take action" to keep global warming from hitting (whatever number)? They have taken literally NO action to date. They are taking literally NO action right now. There is ZERO value in a current politician costing their constituents jobs Now in order to change global temperatures in 40 or 50 years... So... the premise is unsubstantiated. It's like saying US joblessness will change because the government is going to stop illegal immigration and stop US companies from making things overseas. It's a nice thing to say, but it literally never happens.
  • mike runkle on January 17 2020 said:
    Another chicken little article on oils demise,,,,,oil is the foundation of every economically feasible modern economy and will only be replaced by something more economical. We are nowhere even close to that. Because of current infrastructure, when it does happen, it will be implemented slowly over time as to not shock the current financial system. Socially it is now "Cool" to bad mouth fossil fuels. That is just a display of collective ignorance. Oil is the foundation of every modern economy.

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