Stranded oil and gas assets

A key question for the oil and gas industry is whether the lower oil and gas prices and lower volumes of oil and gas produced in the SDS, compared with the STEPS, are likely to lead to widespread losses.

There are multiple strands to this debate. While these are interrelated, they are too often conflated. This occurs partly as a result of loose terminology, and as a result there is a high degree of confusion surrounding discussions of the potential value of losses resulting from climate change policy. It is therefore useful to distinguish between different impacts and losses that could be incurred by the oil and gas industry. This report distinguishes among:

•stranded volumes: existing fossil fuel reserves that will be left unexploited as a result of climate policy

•stranded capital: capital investment in fossil fuel infrastructure which is not recovered over the operating lifetime of the asset because of reduced demand or reduced prices resulting from climate policy

•stranded value: a reduction in the future revenue generated by an asset or asset owner assessed at a given point in time because of reduced demand or reduced prices resulting from climate policy.

These different possible losses would pose different problems for the oil and gas industry and other market participants. For example, for stranded capital, if an asset is taken out of service before it has been able to recover the original investment, the parent company’s total capital would be reduced, potentially lowering its ability to make future investments.

For stranded value, it is necessary to compare values between a scenario that contains strong climate policy and for one that does not. Estimates can be very sensitive to the specific “counterfactual” scenario

chosen – the analysis below compares differences between the SDS and the STEPS.

Overall, we find that the risks of stranded assets in the oil and gas industry during energy transitions are not in the places or magnitudes that are often assumed. In particular, the risk of stranded volumes is significantly higher for NOCs than for the Majors or Independents. With regard to stranded value, the estimate of the present value of the longterm difference in net income (for privately traded companies) between the two scenarios is less than the drop in their value already seen in 2014-15. The risk of stranded value could, however, be larger in midand downstream assets as these tend to have long operating lifetimes.

Billion tonnes CO

3 000

2 500

2 000

1 500

1000

500

0

Oil

Natrual gas

Coal

of fossil fuels