Keep Watch for Potentially Stranded Assets

Offshore Oil Rig
November 26, 2019
By Laurie Toupin

Good news: Climate change activity is gaining momentum!

Bad news: Some corporate assets may be devalued and no longer be used as a result.

This phenomenon, known as “stranded assets,” looms particularly large for the oil and gas and coal industries, in spite of the administrative and regulatory support that they’re getting from the U.S. Federal government.

One of the first industries to experience this dilemma was the whaling industry. When electricity replaced whale oil as a fuel, entire fleets were left stranded — not needed and no longer useful.

A more recent example in the United States is the steel industry, when companies began using less expensive steel made overseas.

In a September 10, 2019 article on the topic, GreenBiz Group chairman and Executive Editor Joel Makower writes that the term today is “most commonly used to describe oil and gas resources that haven’t yet been extracted, but which appear as assets on companies’ ledgers.”  

Based on the Paris Agreement, leaders and scientists worldwide mostly agree that the Earth’s average global temperature rise — caused by greenhouse gas emissions — should not exceed 2 °C.

In order to achieve this, “a third of oil reserves, half of gas reserves and over 80 per cent of current coal reserves should remain unused from 2010 to 2050,” according to “The geographical distribution of fossil fuels unused when limiting global warming to 2 °C”, a report in Nature published in January 2015.

This could cost the fossil fuel industry $28 trillion in revenues over the next two decades.

Why should we care?

According to the report “Stranded Assets: A Climate Risk Challenge” published by the Inter-American Development Bank, “Stranded assets could be a systemic risk to financial stability and should therefore be a topic of concern for central banks and financial regulators.”

And where economic stability is concerned, we all need to be vigilant and aware.

For years, fossil fuels have been a mover and shaker in the world economy. These industries have typically been seen as a safe financial bet. Tens of millions of individuals are invested in these companies through mutual funds and pension plans.

Makower writes, “A dramatic drop in oil prices could cause a huge ‘carbon bubble’ built on long-term investments to burst.”

Professor Jorge Viñuales, from Cambridge University and founder of C-EENRG (Cambridge University’s Centre for Environment, Energy and Natural Resource Governance), puts this into perspective. In a 2018 study, “‘Carbon bubble’ coming that could wipe trillions from the global economy”, he and co-author Dr. Jean-Francois Mercure from Radboud University and C-EENRG found that “the equivalent of between one and four trillion US dollars could be wiped off the global economy in fossil fuel assets alone.” By comparison, a loss of $250 billion triggered the crash of 2008.

“Our analysis suggests that, contrary to investor expectations, the stranding of fossil fuels assets may happen even without new climate policies. This suggests a carbon bubble is forming and it is likely to burst,” writes Viñuales.

Moreover, in his article “Will plastic become the next stranded asset”, Andrew Wong reported that IEEFA found that investment giant BlackRock has lost an estimated $90 billion over the last decade – through investing in fossil fuel companies. According to the IEEFA report, Wong writes, BlackRock suffered the bulk of its losses through investments in some of the largest oil conglomerates globally.

Wong argues that, as a subset of the petroleum industry, plastics may also see a decline, as government regulations are passed to restrict use of single use plastic, for example.

“Individual nations cannot avoid the situation by ignoring the Paris Agreement or burying their heads in coal and tar sands,” Viñuales said. “For too long, global climate policy has been seen as a prisoner’s dilemma game, where some nations can do nothing and get a ‘free ride’ on the efforts of others. Our results show this is no longer the case.”

Some argue though, that the concept of stranded assets is actually too generous of a term. In a blog post titled “The Myth of ‘Stranded Assets’ in Climate Protection”, author R. Andreas Kraemer from the Institute for Advanced Sustainability Studies in Potsdam, Germany, writes “…there are no stranded assets in fossil energy companies caused by climate policy or the shift to green energy; any write-downs are the consequence of bad investment decisions and unjustified valuations, investments made in willful ignorance of the true costs and risks.”

Stranded or not, it is time that we all pay a bit more attention to the investments we are making in the future.

Author

Laurie Toupin