Major oil companies could get caught in a stranded asset trap worth as much as $500 billion if the current high oil prices tempt them to invest massively in hydrocarbons, environmental think tank, Carbon Tracker, has said.
In a report, the organisation warned that spike in demand and prices could be short-lived, seeing freshly sanctioned megaprojects coming online just as demand starts to fall.
The climate finance think tank warned that the recent rebound in oil prices could lure international oil giants into spending billions on new projects that could quickly become stranded assets.
It cautioned under its “high investment” scenario that companies sanctioning projects based on a breakeven price of up to $60 per barrel could risk some $500 billion worth of investment becoming trapped.
The financial analyst group said that if oil prices fall to an average of $40 per barrel after 2026, some $530 billion of investment would be squandered on hydrocarbon developments that were “no longer commercial” under the “high investment” case.
However, it added that a $40 per barrel price assumption is conservative, adding an oil price of under $30 per barrel could see upwards of $1 trillion of investment being wasted.
Although a breakeven price of $60 per barrel would initially help meet short-term oil demand up to 2026, but it warned that these projects would hit peak output “just as demand starts to decline significantly”, triggering “heavily oversupplied market prices to plummet and high-cost projects to risk becoming stranded”.
The Carbon Tracker report spotlighted a number of potentially exposed big-ticket oil and gas developments that rely on breakeven oil prices of over $50 per barrel, but will only start producing late this decade.
These include: Kuwait Petroleum’s $7.5 billion Lower Fars heavy oil project in Kuwait; ExxonMobil and Shell’s $6.7 billion Bosi project in Nigeria; Petrobras, Shell and Galp’s $3.1 billion Tupi project in Brazil; and ExxonMobil, Equinor, Galp and Sinopec’s $3 billion Bacalhau project in Brazil.
“Companies may see high prices as a huge neon sign pointing towards investment in more supply.
“However, this could become a nightmare scenario if they go ahead with projects which deliver oil around the time that demand starts to decline. Shareholders could face catastrophic levels of value destruction as prices fall,” the report noted.
