Climate, Energy, Oil & Gas

Stranded Assets

When a fossil fuel company proposes a new project, it’s no surprise to see environmental advocates and local communities raise opposition. Times are changing though and CBC journalist Don Pittis is warning investors to take note.

The Canadian Association of Petroleum Producers just released a report announcing a $50 billion drop in Canadian oil and gas investment, raising concerns that assets may not last long enough to pay off. After all, if we are to have any hope of meeting world governments’ extraordinarily ambitious goal of keeping global temperature rise below 2 degrees Celsius, the majority of new projects must not be allowed to proceed. If they do gain approval, other projects will need to be shut down. There’s no more room in the planet’s carbon budget. Further fossil fuel extraction would equal a death sentence for the climate as we know it. Our choice to drill would be like writing our own obituary.

Stranded Assets

“Stranded Assets” is a concept to describe how companies and potential investors should assess the value of corporate reserves of coal, oil and natural gas. If extracting those assets would cause serious damage to the environment and/or society, then it is completely unreasonable for the company to calculate the value of those proven reserves in the traditional manner. After all, they would hopefully never be permitted to extract them.

CAPP’s new report extends these assets beyond the resources in the ground and includes the plants and equipment required to make the final product and get it to market. This means pipelines must be considered as potentially stranded assets if their existing enables further extraction of fossil fuels which would contribute to catastrophic climate change. Interesting times!

Investment Costs

Like most major infrastructure projects, pipelines and new oilsands operations take decades to earn back their initial investment costs. The investment is only worthwhile if the investor considers all potential risks and decides that the benefits outweigh those risks. Currently, fossil fuel investors are hopped up on “drill baby drill” and turning a blind eye to both climate change and greenhouse gas reduction targets.

“Investors putting money into new carbon-emitting infrastructure need to ask hard questions about how long those assets will operate for, and assess the risk of future shutdowns and writeoffs,” says Cameron Hepburn, CAPP Study.

For their own financial benefit, investors should truly consider whether the climate risk has been adequately factored into the future income stream. If investors disregard the reality of the climate challenge, they’re going to have a big wakeup call when they find those assets stranded and worth much less than initially advertised!


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