Carbon pricing will reduce oil and gas asset value, but not as much as you might think: WoodMac

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It has never been more important to understand the value of assets that is at risk as countries, particularly in the Organization for Economic Co-operation and Development (OECD), implement a price on carbon, says consulting firm Wood Mackenzie.

That’s why they have put together a report reviewing the impacts of carbon pricing called Positioning for the Future, which they say is first of its kind.

“The carbon emissions targets set by the Paris Agreement, together with potential policy changes, are starting to influence investors’ capital decisions and shape companies’ long-term corporate strategies,” said Gavin Law, head of WoodMac’s gas and power consulting.

“More countries are placing a price on carbon or imposing carbon-related regulations. This increases cost.”

A carbon price of US$40 per tonne of CO2 could reduce the value of upstream oil and gas assets by up to seven per cent, depending upon the regulatory regime, according to the study.

However, the actual reduction is expected to be closer to two per cent under the most likely fiscal and regulatory scenario, according to co-author Amy Bowe.

In this scenario, liquid asset costs would increase by about US80 cents per barrel on average, although the impact could be more than twice that for high-intensity operations, such as oilsands and LNG.

“Under this most likely scenario, total value at risk would be an estimated $45 billion,” she said.

“This is far less than many expect in terms of the direct impact of carbon costs on company portfolios.”

As part of the study, Wood Mackenzie looked at 25 majors, national oil companies and internationally focused large caps, using data drawn from its data base of upstream information.

“The most intriguing finding was that, on the whole, the risk is less than we expected,” said Bowe.

Another key finding of the study is that gross emissions from the assets examined are growing slightly faster than production, at about 17 per cent to 2025 versus 15 per cent for production.

“This is being driven largely by the higher intensity of primary growth themes — heavy oil, oilsands and liquefied natural gas (LNG),” said Bowe.

Conventional onshore assets are still the largest single source of emissions and production to 2025 but they represent a declining share in each case, she noted.

“In contrast, LNG emissions are forecast to realize the largest — and fastest — absolute increase, with liquefaction emissions also growing at the fastest rate of all the sources, about 43 per cent versus 22 per cent production growth.”

Although oilsands and heavy oil combined comprise about only four per cent of global production, by 2025 they are forecast to comprise roughly 12 per cent of global upstream emissions due to their high carbon intensity, the study found.

The study also found that asset mix influences a company’s emissions intensity. Portfolio emissions intensities range from 1.8 to 8.0 grams of carbon dioxide per megajoule of production, with the majors having the highest emissions intensity on average, but the least variation as a group, while the large caps are most diverse.