Billions In Worthless Assets Plague The Oil & Gas Industry

By Nick Cunningham

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.

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.

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