ECONOMIC SILUET: Exxon's stranded assets

Kamis, 04 November 2021

Exxon's stranded assets

THU, NOV 04, 2021

YOUR AFTERNOON NEWS UPDATE AND MARKET ACTION FROM CNBC

AS OF THU, NOV 04, 2021 • 11:14 ET

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EDITOR'S NOTE

Back in 2011, Carbon Tracker published its first "stranded assets" report, warning that 80% of fossil fuel reserves would be unburnable if the world sticks to its goal of limiting global warming to 2 degrees Celsius.

"Governments and global markets are currently treating as assets, reserves equivalent to nearly 5 times the carbon budget for the next 40 years," they wrote. If only 20% of those reserves can actually be used, those assets would fast become liabilities--and their holders' value would collapse. "Just one of the largest companies listed in London, such as Shell, BP, or Xstrata, has enough reserves to use up the UK's carbon budget to 2050," they noted. In other words, the math doesn't add up.

But in 2011, few were taking climate goals and carbon targets as seriously as they do now. Investors could basically ignore them. That is no longer the case. The Carbon Tracker scenario is starting to play out. The eye-rolling about the Cop26 climate summit in Glasgow right now ("they're all taking private jets! They're eating climate-unfriendly meals! Leonardo DiCaprio shows how unserious this all is!) actually misses the point. The Paris Agreement adopted at Cop21 six years ago, in which countries agreed to limit temperature rise to "well below" 2 degrees above pre-industrial levels, was a crucial turning point.

Governments, led by Europe, have since then started to much more seriously enforce "net zero" carbon targets. As a result, the cost of emitting carbon has been on a historic climb; a proxy for this is the KraneShares $KRBN ETF, up 70% since January. Investors globally are also now pushing for "ESG" goals that disfavor fossil fuel producers. And in a landmark ruling in May, the Hague ruled that Shell must reduce so-called "Scope 3" emissions--the vast, indirect bulk of its carbon exposure--by 45% to meet global warming targets.

Point being, reducing emissions is no longer an environmental talking point, but a requirement enforceable--at least in Europe--by law. Or in the U.S., by markets. It's why Exxon may abandon two of its biggest oil and gas projects, in Vietnam and Mozambique, because they have the highest carbon emissions in the company's current pipeline. But it's one thing to not pursue new multi-billion dollar investments. And it's another thing if current assets become less economical.

All of which brings me to Exxon's securities filing yesterday. For the first time, it said that "some of its oil and gas properties may face impairment due to climate change," as Reuters reported. The company's annual asset review will now test for climate impairments as part of overall "enterprise risk." Ironically, this is sort of what its fight against New York's attorney general back in 2019 was about. Exxon won that battle, which accused it of intentionally misleading investors about its exposure. But now, with new ESG-minded board members, it's getting more serious about climate risks.

What happens to reserves if the U.S. gets more serious about "net zero" goals, as President Biden has been trying to do? It's not just that current reserves might be uneconomical, but that companies could have to pay to shut existing operations down. "The oil and gas industry's end-of-life expenses are ballooning," warned the Center for International Environmental Law in an April report. They cite "higher-than-expected closure costs, particularly for fracked and deepwater wells," and say these "significant liabilities represent a material risk that should deter financing."

Perhaps it's all wishful thinking by the greens. But if this is not a scenario that could actually come to pass, the oil and gas industry had better start explaining that to worried investors.

See you at 1 p.m!

Kelly

Kelly Evans
Twitter: @KellyCNBC

Instagram: @realkellyevans

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