Carbon Tracker: Rising oil prices could create $500bn stranded asset trap

Rising oil prices could create $500bn stranded asset trap – Report

Major oil companies could get caught in a stranded asset trap worth as much as $500 billion if the current high oil prices tempt them to invest massively in hydrocarbons, environmental think tank, Carbon Tracker, has said.

In a report obtained Tuesday by Business Metrics, the organisation warned that spike in demand and prices could be short-lived, seeing freshly sanctioned megaprojects coming online just as demand starts to fall.

The climate finance think tank warned that the recent rebound in oil prices could lure international oil giants into spending billions on new projects that could quickly become stranded assets.

It cautioned under its “high investment” scenario that companies sanctioning projects based on a breakeven price of up to $60 per barrel could risk some $500 billion worth of investment becoming trapped.

Figure 1 – High investment case severely oversupplies market in period 2 (2027-2040)

The financial analyst group said that if oil prices fall to an average of $40 per barrel after 2026, some $530 billion of investment would be squandered on hydrocarbon developments that were “no longer commercial” under the “high investment” case.

However, it added that a $40 per barrel price assumption is conservative, adding an oil price of under $30 per barrel could see upwards of $1 trillion of investment being wasted.

Although a breakeven price of $60 per barrel would initially help meet short-term oil demand up to 2026, but it warned that these projects would hit peak output “just as demand starts to decline significantly”, triggering “heavily oversupplied market prices to plummet and high-cost projects to risk becoming stranded”.

The Carbon Tracker report spotlighted a number of potentially exposed big-ticket oil and gas developments that rely on breakeven oil prices of over $50 per barrel, but will only start producing late this decade.

These include: Kuwait Petroleum’s $7.5 billion Lower Fars heavy oil project in Kuwait; ExxonMobil and Shell’s $6.7 billion Bosi project in Nigeria; Petrobras, Shell and Galp’s $3.1 billion Tupi project in Brazil; and ExxonMobil, Equinor, Galp and Sinopec’s $3 billion Bacalhau project in Brazil.

“Companies may see high prices as a huge neon sign pointing towards investment in more supply.

“However, this could become a nightmare scenario if they go ahead with projects which deliver oil around the time that demand starts to decline. Shareholders could face catastrophic levels of value destruction as prices fall,” the report noted.

Capex (2022-2030) on projects approved in 2022-2026 split by commerciality at two supply cases and three long-run oil prices

It further warned that short-term demand growth could see even greater reductions in a bid to keep the goals of the Paris Agreement alive and limit global temperature rises.

“Companies basing sanctioning decisions on bullish short-term signals thus risk significant over-investment, seriously impacting shareholder value. It wouldn’t be the first time that the industry has fallen into this trap,” it added.

According to the report: “Surging oil prices may tempt oil and gas companies to make long-term investment decisions that cost shareholders dearly, but a cautious managed approach to the energy transition would do most to preserve shareholder value and help society achieve climate goals.”

But it added that the rising costs of raw materials have already begun to affect the renewable energy and EV industry, making their products costlier and reducing the number of people willing to switch to a lower-carbon alternative to fossil fuels.

It has also jeopardized the progress of the energy transition, according to the analysts, raising the price tag substantially.