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Action on Climate, $40/Barrel Oil Could Mean Trillions in Stranded Fossil Assets

With colossal fossils Total and Shell downgrading the value of their oil and gas assets, BP pledging to cut oil and gas production 40% by 2030, and even fossil behemoth ExxonMobil ripping up a US$30-billion plan to renew its oil and gas reserves, Bloomberg Green is out with a timely explainer on stranded assets.

“When you see a half-constructed building that’s been abandoned, it’s a sign the project no longer made economic sense,” Bloomberg writes this week. “There’s an argument that trillions of dollars’ worth of investments to tap new supplies of oil and gas might suffer the same fate, leaving deposits of oil in the ground.”

While that possibility may have “seemed like an abstract debate” until recently, it’s been “made very real by the sharp drop in oil prices in 2020, leading some major companies to shift plans away from fields where drilling is costlier or whose deposits are more carbon intensive.”

The two driving factors Bloomberg identifies: decarbonization efforts in response to the climate crisis, and global oil prices mired at US$40 per barrel.

The basic argument for stranded assets is that the value of some new fossil projects could fall to zero if governments get serious about their pledges to cut greenhouse gas emissions. Analysts and investors who share that concern “argue that it’s time financial markets consider the economic risks of climate change and factor in the possibility of tough restrictions coming into effect,” the news agency says. “The hit to the world economy from the coronavirus pandemic isn’t helping, and neither is oil price volatility.”

While oil prices have recovered from the $20-per-barrel threshold they hit during the first wave of the pandemic (not to mention a brief foray as low as -$37.63), their current level around $40 is far below the average of $65 per barrel over the last couple of decades. “The oil price decline has led to a big rollback of shale drilling, and a drop in demand for carbon-based fuels could hurt prices further and make new projects uneconomical.”

Bloomberg cites Carbon Tracker’s estimate that about one-third of the $6.5 trillion in investment that fossils are planning through 2030 could be stranded if countries pursue the Paris Agreement target of keeping average global warming “well below” 2.0°C. By 2019, that prospect had a senior official at BP indicating the company could set aside longer-term, more complicated oil and gas fields in favour of projects it could develop more quickly.

Ultimately, “the pressure to curb emissions may prompt companies to leave the most carbon-intensive reserves untouched,” Bloomberg writes, citing Rystad Energy Vice President Parul Chopra. “Across the industry, projects most at risk include deep-water discoveries off Brazil, Angola, and in the Gulf of Mexico, as well as some Canadian oil sands assets.”

Get Bloomberg’s full analysis here.