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| Thu, 4th Jun 2020 16:12:00 |
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Energy transition 'to wipe $25trn off the value of fossil-fuel reserves': report |
Two thirds of the value of the world's oil and gas reserves — totalling $25trn — could be wiped out as the energy transition disrupts the entire fossil-fuel system, with profound ramifications for financial markets and geopolitics, according to a report.
Cheaper renewable technologies, more aggressive government climate policies and reduced demand due to the coronavirus pandemic are leading to lower prices, reduced profit and rising investment risk, said London-based financial think-tank Carbon Tracker.
These forces are "likely to slash the value of oil, gas and coal reserves by nearly two-thirds, increasing the risk and likelihood of stranded assets".
Carbon Tracker argues that a 2% decline in demand for fossil fuels every year — which is needed for the world to meet the Paris Agreement goals — could cause the future profits from oil, gas and coal reserves to fall from an estimated $39tn to just $14tn, a loss of $25trn.
"The size of the gap in expected wealth between the desires of the petrostates and the aspirations of the Paris Agreement is in the order of $100trn," the think-tank stated.
"The gap is a threat to the stability of some petrostates. The petrostates hope for growth in demand and for a return to the high level of rents [the difference between the value of crude oil production at world prices and total costs of production] of the period before 2014. The Paris Agreement requires an annual decline in demand of 2%," it said.
The report's author, Kingsmill Bond, said: "We are witnessing the decline and fall of the fossil fuel economy. Technological innovation and policy support is driving peak fossil fuel demand in sector after sector and country after country, and the Covid-19 pandemic has accelerated this. We may now have seen peak fossil fuel demand as a whole.
"This is a huge opportunity for countries that import fossil fuels which can save trillions of dollars by switching to a clean energy economy in line with the Paris Agreement. Now is the time to plan an orderly wind-down of fossil-fuel assets and manage the impact on the global economy rather than try to sustain the unsustainable.
"Investors need to increase discount rates, reduce expected prices, curtail terminal values and account for the clean-up costs."
He added that there needs to be a change in mindset among the fossil-fuel industry.
"The bizarre thing is that the fossil fuel incumbents have been so resistant to the idea of change for so long, and put out so much bogus PR, that they risk falling victim to their own rhetoric," he said.
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