1.5°C Means $900-Billion in Stranded Assets for Fossils

The world’s oil and gas companies may have to write off a “breathtaking” US$900 billion in stranded assets—about one-third of their total value—if governments get serious about limiting average global warming to 1.5°C, according to the news analysis page that calls itself the “oldest and arguably the most influential business and finance column of its kind in the world”.

The Financial Times’ Lex column says that trend is already being driven by global investors whose “trenchant criticism of hydrocarbons has led to a shift in investment away from the traditional energy sector and into renewables”.

The attitude adjustment “represents a big problem for energy groups such as Exxon, BP, and Saudi Aramco,” Lex explains. “Vast swaths of their oil, gas, and coal reserves may never be extracted and burnt because doing so would intensify global warming, worsening freak weather events and threatening the loss of farmland and huge population displacement. That could leave them with large numbers of what are known as ‘stranded assets’.”

Even in a comparatively modest (but far more globally devastating) 2.0°C scenario, “[fossil] energy producers, including coal miners, would have to write off over half of their fossil fuel reserves as stranded,” Lex adds. “If the 1.5°C threshold were to be met then the pain would be greater, leaving over 80% of hydrocarbon assets worthless.”

It’s a far cry from the days when carbon emissions were treated as a costless “externality” of doing business. Now, “as evidence of climate change has mounted and public opinion shifted, [fossil] energy companies have begun to look at the real financial consequences,” notes Lex writer Alan Livsey. “This has been most notable in the rising cost of capital for hydrocarbons groups and ever-cheaper money for renewables.”

All told, the companies are sitting on assets that represent 2,910 billion tonnes of carbon dioxide emissions or equivalent, two-thirds of the total in coal, the rest in oil and gas, leading to increasingly frequent and pointed questions about how long those holdings will retain their value. “Oil companies need to think about [preparing] themselves for when their cost of capital soars,” said Ben Caldecott, director of the Oxford University Sustainable Finance Program.

That cost has already begun to increase. “Most international oil companies, and some national ones, have shares and bonds trading on the capital markets,” Lex states. “The share prices of oil, gas, and coal producers have lower valuations than five years ago. The threat is clear: hundreds of billions of dollars of value could be lost.” And national oil companies like Aramco, “many of which have much more oil and gas in reserves than they can produce in a generation, face even greater risks, regardless of their relationship with the capital markets.”

Livsey goes through the carbon budget remaining for fossil fuel production in various climate scenarios, ranging from 1.5 to 3.0°C. At 3.0°, he says most known fossils reserves could still be burned (but the implications for humanity and other life on Earth would be catastrophic). At 1.5°, just 16% of the reserves would be usable.

Most international oil companies “understand the threats ahead, even if they do not all appear to have accepted how much action is needed to solve the problem of excess carbon emissions,” Lex notes. “Some of the largest, such as Total of France and Royal Dutch Shell, have invested in renewable energy projects ranging from solar power to biofuels.”

But the proportion of total capital expenditure by the largest oil and gas companies, going to low-carbon businesses, represents less than 1% of investment,” the column adds, citing independent analysis of recent data from the International Energy Agency.