FINANCE
Energy majors face $3.3-trillion ‘green’ nightmare
The largest international oil and gas firms wrote down assets worth $150 billion last year, when prices crashed due to the demand slump during the pandemic.
Despite the fact that this year’s oil prices are now nearly double compared to the 2020 average, the energy industry faces additional impairments in the coming years and decades, this time due to the investor pressure to slash emissions and start accounting for changes to energy demand in the transition to low-carbon sources.
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All industries are under pressure to realign their accounting and financing practices to climate change-related risks, but none more so than the large companies in the energy sector the core business of which continues to be oil, gas, and coal.
The increased scrutiny and pressure on companies from investors and society, as well as uncertainties over long-term demand for fossil fuels, could leave assets currently estimated to be worth trillions of US dollars stranded in the future.
Recent studies have suggested that more than half of oil and gas reserves should remain in the ground if the world is to limit global warming to 1.5 degrees Celsius above pre-industrial levels by 2050.
Carbon prices and additional regulations to limit carbon emissions could make a greater number of fossil fuel assets – especially coal – unprofitable as governments, especially in developed nations, press for net-zero emission economies by 2050.
Businesses are waiting for details on carbon markets and carbon emission rules and, potentially, carbon taxes, before re-evaluating their assets, analysts tell The Wall Street Journal.
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“Carbon charges are likely to come, and they will transform the upstream sector, affecting both asset values and the industry’s economics,” WoodMac analysts said earlier this year.
With carbon taxes and prices, more reserves and operations of energy companies, not only in the upstream sector, could be left as “stranded assets.”
Energy Firms Face Trillions Of Stranded Assets By 2050
In its World Energy Transitions Outlook: 1.5°C Pathway report from June 2021, the International Renewable Energy Agency (IRENA) reiterated its estimates from two years ago.
“Delaying action could cause this value to rise to an alarming $6.5 trillion by 2050 – almost double. Planning in advance also supports a just transition, assisting in the reallocation and creation of jobs and services,” according to IRENA.
Last year, the biggest oil and gas firms in North America and Europe alone wrote down over $150 billion off the value of their assets, the highest since at least 2010 and representing around 10% of the companies’ combined market capitalizations, an analysis by the Wall Street Journal showed in December.
The reassessment of oil and gas assets was so widespread that even ExxonMobil – which, until last year, hadn’t really adjusted the value of its assets in many years – warned of massive write-downs of between $17 billion and $20 billion after-tax in Q4 in its gas assets in the United States, Canada, and Argentina, due to the pandemic and its effect on the industry. TotalEnergies even used “stranded assets” in qualifying Canadian oil sands projects Fort Hills and Surmont as such.
While the write-downs of 2020 were the direct result of the collapse in prices leading to the reduced value of assets, future impairments would likely be driven by climate-related risks, analysts and think tanks say.
Not all assets will pass the scrutiny to be resilient and profitable in a world that will still need oil and gas but aims to significantly limit energy-related emissions.
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Long-Term Stranded Assets Risk
If the world’s 60 largest listed oil and gas companies continue with a business-as-usual approach, more than $1 trillion of such business-as-usual investment is at risk, including $480 billion in shale/tight oil projects and $240 billion in deepwater projects, financial think tank Carbon Tracker said in a report in September.
“Companies and investors must prepare for a world of lower long-term fossil fuel prices and a smaller oil and gas industry, and recognise now the risk of stranded assets that this creates,” Carbon Tracker Head of Oil, Gas and Mining and report co-author Mike Coffin said.
According to a recent study of researchers from the University College London (UCL), nearly 60% of both oil and fossil methane gas and almost 90% of coal must remain in the ground by 2050 in order to keep global warming below 1.5 degrees Celsius. The findings, published in Nature in September, are based on a 50% probability of limiting warming to 1.5 degrees Celsius this century. This would mean that reaching this target would require an even more rapid decline in production and more fossil fuels left in the ground, UCL researchers say.
Still, the world will need oil and gas for decades to come. Yet, the pressure to account for climate-related risk to assets could bring about billions of asset impairments in the energy industry every year and leave trillions-worth of fossil fuel assets stranded.
“Just a few years ago, few within the oil and gas industry would even countenance ideas of climate risk, peak demand, stranded assets, liquidation business models and so on. Today, companies are building strategies around these ideas,” Luke Parker, vice president, corporate analysis, at Wood Mackenzie said last year, commenting on the massive write-downs at Shell and BP.
“Demand might still grow from here, and many companies are still chasing a share of that growth. But make no mistake, the corporate landscape is changing, and the majors are changing with it.”
For more stories on economy & finance visit TSFT’s business section
Germany’s GDP could stagnate or even decline in the third quarter, Bundesbank has warned
The German economy has been shrinking over the past two years and will remain stagnant for the rest of the year as it continues to grapple with economic malaise, Bloomberg reported on Friday.
According to a survey conducted by the outlet, the EU’s top economy has been stalling in the three months through September, marking a deeper-than-expected decline.
Economists have already started downgrading their forecasts for this year, with some now seeing protracted stagnation or even another downturn.
“While we expect the market to see a mild recovery at the end of 2024 and in 2025, much of it will be cyclical, with downside risks remaining acute,” Martin Belchev, an analyst at FrontierView told Bloomberg.
He warned that the faltering automotive sector will further exacerbate downward pressures on growth as the top four German carmakers have seen double-digit declines.
Thousands of EU automotive jobs at risk – Bloomberg
The country’s central bank said on Thursday in its monthly report that the German economy may already be in recession. According to the Bundesbank, gross domestic product (GDP) “could stagnate or decline slightly again” in the third quarter, after a 0.1% contraction in the second quarter.
Economic sentiment in the country has suffered due to weak industrial activity, Budensbank President Joachim Nagel said on Wednesday.
“Stagnation might be more or less on the cards for full-year 2024 as well if the latest forecasts by economic research institutes are anything to go by,” he said.
German industry is struggling amid weak demand in key export markets, shortages of qualified workers, tighter monetary policy, the protracted fallout from the energy crisis, and growing competition from China, Bloomberg noted.
The Eurozone’s largest economy has been falling behind its peers over the past years, largely due to a prolonged manufacturing downturn. Germany was the only Group of Seven economy to contract in 2023.
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A third of the region’s major car plants are currently operating at half capacity or less, according to a report
European auto makers are facing more plant closures as they struggle to keep up with the electric vehicle (EV) transition amid slowing demand and growing competition, Bloomberg reported on Wednesday.
According to the outlet’s analysis of data from Just Auto, nearly a third of the major passenger-car plants from the five largest manufacturers – BMW, Mercedes-Benz, Stellantis, Renault and VW – were underutilized last year. The auto giants were producing fewer than half the vehicles they have the capacity to make, the figures showed.
Annual sales in Europe are reportedly around 3 million cars below pre-pandemic levels, leaving factories unfilled and putting thousands of jobs at risk.
The report pointed out that sites shutting down would add to concerns that the region is facing a protracted downturn after falling behind key competitors, the US and China.
“More carmakers are fighting for pieces of a smaller pie,” Matthias Schmidt, an independent auto analyst based near Hamburg, told Bloomberg. “Some production plants definitely will have to go,” he warned.
VW announced last week it was considering closing factories in Germany for the first time in its near nine-decade history. The automaker said it was struggling with the transition away from fossil fuels.
BMW has warned that tepid demand in China poses a further threat to sales and profits.
Volkswagen planning major cutbacks in Germany
The threat of factory closures in Europe has worsened in recent years amid skyrocketing energy prices and worker shortages that have driven up labor costs.
“Failure to turn things around would deal a blow to the region’s economy,” Bloomberg wrote, pointing out that the auto industry accounts for over 7% of the EU’s GDP and more than 13 million jobs.
Car-assembly plants often are “anchors of a community,” securing work at countless nearby businesses, from suppliers of engine parts and trucking companies to the local bakery delivering to the staff cafeteria, the report said.
Closing plants is usually “the last resort” in a region where unions and politicians have a strong hold over corporate decision-making, concluded Bloomberg.
There’s “massive consolidation pressure” for auto plants in Europe, Fabian Brandt, an industry expert for consultancy Oliver Wyman, said. “Inefficient factories will be evaluated, and there will be other kinds of plants that shut down,” he claimed.
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