Fault Lines: How diverging oil and gas company strategies link to stranded asset risk

In a series of reports since 2011, Carbon Tracker has shown the financial risks to fossil fuel producers related to the shift to a lower carbon economy, in a world where stabilising global temperatures to any level puts a finite limit on the amount of CO2 that we can emit (“the carbon budget”).

In particular, this report looked at the risk of investing in “stranded assets” – projects that fail to deliver adequate returns as conditions change. It looks at potential capital expenditure (“capex”) that might be spent on such stranded assets in the oil and gas industry using an economic framework, and focus on company and project level results. The report updates previous work on this theme, Carbon Tracker’s 2 Degrees of Separation series, including 2019’s Breaking the Habit.

Key findings include:

• Far from simply an “ESG” issue (environmental, social and governance), for fossil fuel producers the energy transition represents an existential concern that goes right to the heart of strategy.
• Oil and gas companies’ emissions ambitions, scale of capex at risk and internal oil price assumptions for impairment tests are all highly correlated.
• European producers clearly outperform their US counterparts
• US companies don’t disclose their impairment price assumptions. 
• Companies are taking diverging views of the future 
• Carbon Tracker highlights $60bn capex associated with the 15 largest projects sanctioned in 2019 that aren’t competitive on economics under the International Energy Agency’s 1.65-1.8˚C Sustainable Development Scenario (SDS). 
• All of the majors have assets available for sanction in 2020- 22 that fall outside the SDS.