Pump it while you can: stranded asset risk and the race to produce
'Pump it while you can' may be the new modus operandi for the oil and gas industry. The acceleration in the deployment of renewable energy technologies, coupled with the emergence of unconventional oil production in the United States, fundamentally shifts the outlook for the future of oil and gas. As evidenced in BP’s recently published Energy Outlook, the abundance of oil supply, alongside the prospect of slowing demand, has created a strategic incentive for producers to sell their oil now to ensure these reserves do not end up 'stranded' – or unprofitable to produce – in the future.
In a recent quote in the Financial Times, BP’s chief economist Spencer Dale sounded the warning on this stranded asset risk, stating: “I think it is increasingly likely that there will be technically recoverable oil reserves which will never be extracted and if I was the owner of one of those companies which owned that oil I would have every incentive to make sure it wasn’t mine [left in the ground].”
BP’s view of stranded asset risk resonates strongly with the concept of a global 'carbon budget' established by the International Panel on Climate Change. This 'carbon budget' quantifies the amount of carbon dioxide that can be emitted while limiting the global average temperature rise to no more than 1.5C, 2C, or 3C above pre-industrial levels. The recent Paris Agreement represents a cooperative framework through which participating countries have expressed their commitments to adhere to the carbon budget by implementing policies to limit greenhouse gas emissions. With a finite carbon budget established, fossil fuel producers must now fight for their share of the remaining natural gas, barrels of oil, or tons of coal that can be burned. Any producer that does not sell a barrel of oil now may not have the opportunity to sell that barrel of oil later.
Of equal concern for the fossil fuel industry is the rapidly declining costs, and subsequent increasing market share, of renewable energy generation capacity. As recently reported by the International Energy Agency, 2015 marked the first time in history that renewable energy surpassed coal to become the largest source of installed power capacity in the world. Although BP and other large producers predict oil demand to continue growing through 2035, the pace of this growth will be largely impacted by renewable energy deployment, energy/fuel efficiency improvements, and the electrification of the transportation fleet. These uncertainties further incentivize fossil fuel producers to monetize their assets now, while renewable energy’s share of the market remains low and costs remain relatively high.
In this new competitive landscape for fossil fuel producers, who will be the winners and losers? In its Energy Outlook, BP suggests that low-cost producers, such as the Middle East OPEC nations, will increasingly dominate market share, growing from 56 percent in 2015 to 63 percent by 2035. In contrast, other OPEC members will see their share dwindle from 15 percent in 2015 to less than 10 percent in 2035, largely due to the higher cost of production for these market participants. The increasing dominance of low-cost producers incentivized to maximize market share and mitigate stranded asset risk, combined with technology development leading to slowing demand, will likely exert sustained downward pressure on crude oil prices. BP predicts that natural gas consumption will grow rapidly, with a significant amount of growth in supply coming from unconventional production in the United States. Per the data presented in the Outlook, natural gas will largely supplant coal for power generation, and due its relatively low volume of carbon emissions compared to coal and crude oil, will continue to remain a large portion of the energy supply mix beyond 2035.
With the strategic landscape shifting in such profound ways, how can investors manage their exposure to these emerging risks? The Sustainability Accounting Standards Board (SASB) has established a reporting framework for companies to disclose material sustainability risks to investors – and for the oil and gas Industry, SASB’s standard includes metrics to quantify company exposure to stranded asset risk. Specifically, the standard recommends that oil and gas companies disclose the sensitivity of their reserve levels to future price projection scenarios that account for a price on carbon emissions, as well as the estimated carbon dioxide emissions embedded in proven hydrocarbon reserves. With these indicators, investors will be better equipped to evaluate and manage climate-related risks. According to SASB’s Annual State of Disclosure report, only approximately 30 percent of companies are currently using metrics to disclose information on this topic, and no companies are disclosing the full framework specified in SASB’s standard.
As oil and gas companies compete within a rapidly changing ruleset, investors need the decision-useful, standardized, and material disclosure now more than ever.
David Parham is the Non-Renewable Resources sector analyst at the Sustainability Accounting Standards Board (SASB)
Read the January 2017 issue of Energy Digital magazine
Hydrostor receives $4m funding for A-CAES facility in Canada
Hydrostor has received $4m funding to develop a 300-500MW Advanced Compressed Air Energy Storage (A-CAES) facility in Canada.
The funding will be used to complete essential engineering and planning, and enable Hydrostor to plan construction.
The project will be modeled on Hydrostor’s commercially operating Goderich storage facility, providing up to 12 hours of energy storage.
Hydrostor’s A-CAES system supports Canada’s green economic transition by designing, building, and operating emissions-free energy storage facilities, and employing people, suppliers, and technologies from the oil and gas sector.
The Honorable Seamus O’Regan, Jr. Minister of Natural Resources, said: “Investing in clean technology will lower emissions and increase our competitiveness. This is how we get to net zero by 2050.”
A-CAES has the potential to lower greenhouse gas emissions by enabling the transition to a cleaner and more flexible electricity grid. Specifically, the low-impact and cost-effective technology will reduce the use of fossil fuels and will provide reliable and bankable energy storage solutions for utilities and regulators, while integrating renewable energy for sustainable growth.
Curtis VanWalleghem, Hydrostor’s Chief Executive Officer, said: “We are grateful for the federal government’s support of our long duration energy storage solution that is critical to enabling the clean energy transition. This made-in-Canada solution, with the support of NRCan and Sustainable Development Technology Canada, is ready to be widely deployed within Canada and globally to lower electricity rates and decarbonize the electricity sector."
The Rosamond A-CAES 500MW Project is under advanced development and targeting a 2024 launch. It is designed to turn California’s growing solar and wind resources into on-demand peak capacity while allowing for closure of fossil fuel generating stations.
Hydrostor closed US$37 million (C$49 million) in growth financing in September 2019.