Skip to content

Big Oil Asset Write-Downs Are Not The End Of The Oil Age

Tilak Doshi, Forbes

In the 5 year period to 2019, developing countries accounted for three quarters of global oil demand growth and the Asian developing countries accounted for over 70%. 

Climate change activists have long lobbied for divestment from fossil fuel-producing companies. They have largely failed in this quest. This year, the steep falls in the value of the large oil and gas companies, however, occurred with a rapidity that astonished market watchers. Within weeks, the coronavirus pandemic and the oil market-share battle between Saudi Arabia and Russia launched after the collapse of the OPEC+ talks in early March led to unprecedented falls in Big Oil equity.

The S&P Global Oil Index, measuring the performance of 120 of the largest, publicly-traded companies engaged in oil & gas fell by 45% in the month to March 18th when Brent crude was trading at $25/barrel. ExxonMobil XOM +0.7%, the bluest of blue chips fell 54% in that period while Shell, another Big Oil bellwether, fell 45%.

In mid-June, BP was among the first of the oil majors to announce its intention to write down the value of its assets by up to $17.5 billion after cutting its long term oil forecast (to 2050) from $70/barrel to $55. This was followed a couple of weeks later by another European oil major, Royal Dutch Shell, which reported its plans to write-down its asset base by $22 billion after a similar lowering of its long term oil price forecast.

Stranded Resources and Climate Change Concerns

The campaign to scare fossil fuel investors about “stranded resources” has followed two tracks. This first argues as to what should be done. Citing “consensus science” (an oxymoron), climate change models purportedly linking carbon dioxide emissions with “climate risk” are used to calculate the necessary cuts in oil, gas and coal production.

Hence BlackRock BLK +0.1%, the world’s largest asset manager warned in 2015 that “the majority of fossil fuel reserves will need to be left in the ground” if global warming is not to exceed 2 degrees C. Along the same lines, consultants for the OECD asserted that “vast quantities of resource reserves will need to remain underground in order to stabilize the climate”.Recommended For You

The second track poses the question of what would likely happen under current trends. In this view, technological progress in energy efficiency and renewable energy combined with climate policies pursued by governments around the world will lead to substantial falls in demand for fossil fuels.

Financial Times column, for instance, pointed out that the pursuit of climate change policies would “evaporate” a third of the current value of the big oil and gas companies. If countries met their Paris Agreement commitments and kept to the “no more than 2C above pre-industrial levels” target, 50% of all coal, oil and gas resources would be “stranded” and, by definition, have zero value. If the stricter 1.5o C maximum is aimed for, then 80% of the world’s fossil fuels would be stranded.

Full post