#stranded assets

What this story is telling us is that ExxonMobil has essentially written off the value of its investments in the tar sands oil in Alberta and in the reserves in the US that would be tapped through fracking. When an oil major takes these actions, they are essentially telling the investors: those reserves are worthless.

Excerpt from this story from DeSmog Blog:

Last August, ExxonMobil warned that it may need to remove 20 percent of its oil and gas proved reserves from its books. While that was a shocking number from the oil major, reality proved to be even more of a shock to the company. On February 24, Exxon reported that it would actually remove over 30 percent of its proved reserves from its books — essentially wiping out the value of its Canadian tar sands holdings from its books.

According to the Securities and Exchange Commission (SEC), proved reserves are “the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions.”

Proved reserves are the concept on which the whole oil business is based. It is a main factor in how oil and gas companies are valued and in determining how much money banks will loan companies. Much of oil and gas lending is known as reserved-based lending.

Exxon’s latest move is even more remarkable, however, because it has a reputation for being resistant to properly valuing reserves, often lagging behind the other oil major companies in making these downward adjustments.

In this case, the market — and the SEC— forced Exxon’s hand on the matter. SEC rules require that oil and gas companies value reserves based on the average price of oil from the previous 12 months.

In its latest SEC filing released this week, Exxon explains that this requirement essentially meant removing all of the value for its Canadian tar sands investments from its reserves.

The effort to count so-called stranded assets has a particular resonance in Canada, where having a functioning sustainable debt market is key not only for activities typically considered green, but also for polluters transitioning to cleaner technologies. That’s because its oil and gas companies -- most of them located in the provinces of Alberta and Saskatchewan -- account for more than 20% of the country’s exports.

“The first step is to start collecting data and running the models, so that allows us to say this is the size of the problem,” said Ryan Riordan, head of research at the Institute for Sustainable Finance at the Smith School of Business. “The biggest issue is to reach agreement about what a transition process or asset is.“

The energy industry is the largest source of greenhouse gas emissions, contributing to 26% of the total, according to an interim version of a government-mandated report written by experts, including Royal Bank of Canada board member Andy Chisholm, who is also on the think tank’s advisory board.

A stranded asset refers to fossil fuel investments that risk being rendered near-worthless from the cost of policies designed to combat climate change. 

“Transition risks are of particular significance for Canada given its endowment of carbon-intensive commodities, the current importance of some of these carbon-intensive sectors for the Canadian economy, and the energy needs for cooling and heating,” according to a Nov. 19 article written by Canada’s central bank researcher Miguel Molico.

Measures to limit carbon dioxide emissions so warming doesn’t go above two degrees Celsius may mean leaving a higher proportion of Canadian oil reserves unused compared to other countries, according to a 2015 study written by University College London academics Christophe McGlade & Paul Ekins, which was cited in Molico’s article. A goal of the 2015 Paris Agreement is to hold increases in global temperatures within a range of 1.5 to 2.0 degrees Celsius.

The ISF expects to have an initial estimate of the size of energy-sector stranded assets by early next year, said Riordan.

From The New York Times:

Investors controlling more than $5 trillion in assets have committed to dropping some or all fossil fuel stocks from their portfolios, according to a new report tracking the trend.

The report, released Monday, said the new total was twice the amount measured 15 months ago — a remarkable rise for a movement that began on American college campuses in 2011. Since then, divestment has expanded to the business world and institutional world, and includes large pension funds, insurers, financial institutions and religious organizations. It has also spread around the world, with 688 institutions and nearly 60,000 individuals in 76 countries divesting themselves of shares in at least some kinds of oil, gas and coal companies, according to the report.

“It’s a stunning number,” said Ellen Dorsey, the executive director of the Wallace Global Fund, which has promoted fossil fuel divestment and clean energy investment as part of its philanthropy.

The movement has also received a boost from last year’s Paris climate agreement, which set targets for reducing greenhouse gas emissions to avoid the worst effects of climate change. The push for emissions reductions underscored the potential for the industry to be faced with reserves of fuels that cannot be burned if the targets are to be met — a prospect known as “stranded assets.”

Ms. Dorsey argued that since its beginnings as a moral statement against profiting from companies whose products were exacerbating climate change, more institutions have come to detect vulnerabilities in fossil fuel companies as the world shifts toward renewable sources of energy.

Read the rest of the article here. 

(Photo: Steven Godfrey; Infographic: Carbon Tracker)

Related:

Average people can make a difference on global challenges (Phys.Org)

A beginner’s guide to fossil fuel divestment (The Guardian)

Canadian Medical Association completes divestment from fossil fuels (National Observer)

As fossil fuel diehards take over the White House, the evidence of a fast-moving global energy transition has never been clearer (Jeremy Leggett)

Solar Created More Jobs in 2016 Than Oil, Gas and Coal Combined.  

Carbon Tracker Initiative's Luke Sussams says the dropping costs of renewable energy could see global demand for oil and coal peak by 2020.

Excerpt from this New York Times story:

BP sent a signal to investors on Monday that the economic shock of the pandemic would reverberate for years, and less gas and oil would probably be needed in the future.

The London-based oil giant told shareholders the company expected to write down as much as $17.5 billion of its oil and gas holdings in its next quarterly report.

The write downs are an acknowledgment that the oil and gas fields on BP’s books are not worth as much as they used to be, and will likely stay that way for the foreseeable future. It reflects broad changes in the energy industry as companies are forced to adjust to a new environment.

“Everywhere I have been — inside BP, as well as outside — I have come away with one inescapable conclusion,” Bernard Looney, the chief executive, said in a speech in February. “We have got to change.”

Since then, the coronavirus pandemic has caused steep falls in demand and prices for oil and gas that could linger for a number of years. In addition, pressures from governments, consumers and investors are continuing to increase on oil companies, especially in Europe, to curb the greenhouse gas emissions produced by their fossil fuels.

In past years, companies rushed to acquire oil and gas fields and bring the crude or natural gas to market. Now, analysts say, investors are skeptical of all but the most profitable fossil-fuel investments because it is not clear that there will be demand for them — especially as many governments strive to meet the requirements of the 2015 Paris Agreement on global warming.

Excerpt from this story from InsideClimate News:

Two of the world's largest energy companies have sent their strongest signals yet that the coronavirus pandemic may accelerate a global transition away from oil, and that billions of dollars invested in fossil fuel assets could go to waste.

This week, Royal Dutch Shell said it would slash the value of its oil and gas assets by up to $22  billion amid a crash in oil prices. The announcement came two weeks after a similar declaration by BP, saying it would reduce the value of its assets by up to $17.5 billion. Both companies said the accounting moves were a response not only to the coronavirus-driven recession, but also to global efforts to tackle climate change.

Some analysts say the global oil and gas industry is undergoing a fundamental transformation and is finally being forced to reckon with a future of dwindling demand for its products.