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
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Contrary to such a claim, fossil fuels will continue to drive the global economy throughout the 21st century and probably far beyond underpinned by both rising world population and growing global economy.
There could neither be a global economy nor a modern civilization as the one we know and enjoy without oil and gas. How could the world feed a growing population projected to rise from 7.9 billion today to 9.7 billion by 2050 and a global economy projected to grow in size from $91 trillion in 2021 to $245 trillion also by 2050 without oil and gas?
Environmentalists who call for an abrupt end to fossil fuels and a sudden adoption of renewable energy fail to recognize the obvious lack of logic in this. On their own, renewables aren’t capable of satisfying global demand for electricity and energy because of their intermittent nature.
While the process of global energy transition will continue to move forward, a total energy transition is an illusion. Even a partial one will never succeed without huge contributions from natural gas and nuclear energy.
Equally, the notion of net-zero emissions is a myth. It will never be achieved in 2050 or 2100 or ever. Therefore, the best way to combat climate change is for the global oil industry to focus on reducing carbon emissions from fossil fuels and not their actual use.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
They were wrong about "the wall"
They were wrong about Afghanistan surrender.
They were wrong about defunding the police.
and they were wrong about the right to defend ones self.
Isn't it just within the universe of possibilities that they are also completely wrong about solar and wind power being economically viable, that they are completely wrong about climate change?
That we may just be needing oil for a lot, lot longer in a lot larger amounts than anyone is planning for right now?
- This is the industry's own fault as they have played along with the "climate change" propaganda. Wait, that THEY discovered and HID? Right... Also: really, REALLY easy to show CO2 traps infrared, almost the experiment one could do at home.
- There could neither be a global economy nor a modern civilization as the one we know and enjoy without oil and gas -> gotta give it to you, it's going to be needed for another good 20 years; but do you know how many NEW gas capacity was added to power generation? do you know gas turbine sellers for years have sold ~zero in countries which don't produce gas? why do you figure? yes, solar is cheaper, correct answer. And an area the size of spain could provide all the world's electricity needs from solar alone; read that again SLOWLY and tell me our civilization NEEDS to burn this poison
- reducing the CO2 from fuels but not their actual use - ROFL - from a professor? in what? do you know how burning stuff works, chemically?
- the wall - not a bad idea; defunding police - horrible idea; WHAT do these have to do, aside from being POLITICAL agendas, with the sheer cold calculation of energy and financial efficiency? or the clear theoretical and physical proof of climate change? nothing - those were made into political agendas by deranged individuals, same as gender or race theories; however, unlike stupid theories, these are real, measurable FACTS
Oh, and the population has to stop growing. Global economy has grown ENOUGH on the back of population growth. It's going to stop at some point anyway, since there are physical limits. Why not stop today? 60 years ago we had 2 billion, now we are 8. Seriously. Take it easy.
An EV that ran out of leccy on the M25 and causes a traffic jam.
Unfortunately, Earthlings have become exceedingly agitated and politicized, and we hardly know how to talk to one another.
I'd like to suggest that we recognize we'll need to continue to burn fossil fuel for some time, but proffer this view very reluctantly. The miracle of fossil fuel is not necessarily for all time.
Then the turn toward solar, wind, ocean & river generators will produce more jobs and rapid advancements in this technology. Power companies have produced propaganda articles and studies and have even sabotaged solar electrification through the use of old battery storage designs, not capable of functioning in the environment in which they are placed.
For example; Arizona power companies campaigned heavily here, stating that consumers would be on the hook for new power plants to get voters to turn down the policy of reducing fossil fuel usage by 2030 and then turning around on NEW PLANTS, just a year after the vote; stating they (APS & SRP) were going to expand "existing" gas power plants at the expense of OVER $1 BILLION. The consumer is on the hook for these plants.
The Trump administration negotiated lower oil prices while in control & then raised them when it appeared this Trump & Comp, administration would lose the election. Raising oil prices FROM A REAL PRICE OF NEGATIVE DOLLARS! This put hundreds of small fuel companies out of business; only to be picked up by large oil & gas companies for pennies.
Wind and Solar are actually making things worse not better.