Why Oil Producers May Actually Benefit From Stringent Carbon Emissions Policies

Credit: Julia Kilpatrick/www.Pembina.org.
Living quarters sit on the edge of a Syncrude crude oil production facility in the Athabasca oil sands area north of Fort McMurray, Alberta, Canada, in 2014.

 

There is a great debate going on about investing in oil. Some say the risks of climate change are so urgent that investors should start divesting of their fossil fuel assets immediately. Aside from moral suasion, the economic argument is that today’s reserves-in-the-ground will soon become tomorrow’s stranded assets. However, some important economic factors are being overlooked in the stranded asset debate.

The divestment movement started to gain traction around 2011, led by decarbonization think tanks, off-fossil-fuel organizations, and campus movements. Today, the discussion of the implications of greenhouse gas emissions on climate change and long-term investment returns has shifted from the fringe to mainstream. Institutional investors including pension funds, university endowments, and large asset management groups are all asking oil and gas companies to disclose more carbon accounting information.

Over the past 2 years, shareholders have requested greater climate risk disclosure from companies such as Suncor Energy, Cenovus, ExxonMobil, Chevron, and Occidental Petroleum. In turn, investors and corporations are voluntarily reporting their carbon exposure through initiatives such as the Principles for Responsible Investment, the Carbon Disclosure Project, and the high-profile initiative of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures, which was chaired by Michael Bloomberg and submitted recommendations at the G20 Summit in July 2017.

When thinking about the future of oil investing and financial risk, investors should consider that oil consumption is expected to remain relatively high, even after assuming that worldwide climate change goals have been achieved.

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