Investors should seek ‘risk premium’ from firms pursuing high-cost projects

LONDON/NEW YORK, January 31– The longer nations put off acting on climate change, the greater the risk of stranded assets if governments are forced into a belated “handbrake turn”. Oil companies basing future investments on “business as usual” risk seeing the value of their new projects halved on tougher policy, Carbon Tracker finds in a report today.

It warns investors should demand a higher rate of return to compensate for risk when companies pursue high-cost projects relying on higher oil prices. Of the oil majors, ExxonMobil, ConocoPhillips and Chevron are most exposed to price falls.

Countries have committed to limiting global warming to well below 2°C in the Paris Agreement, but current policies are only on course for about 2.8-3.0°C.  Carbon Tracker warns that the longer they put off acting on climate change, the greater the risk that oil companies that have invested to meet assumed growth in demand will face stranded assets.

The financial think-tank warns that mounting public pressure — driven partly by an increase in alarming extreme weather events — and falling clean technology costs will eventually force lawmakers to act strongly. Carbon Tracker’s new report explores this through the scenario of a delayed Inevitable Policy Response (IPR).

Andrew Grant, senior oil & gas analyst and author said:

“We do not know when or how an Inevitable Policy Response will come, which makes it hard for companies to plan. However, they risk being left with stranded assets if they assume governments will not take forceful action to limit climate change. Preparing in advance and aligning their investment with climate targets will deliver the highest returns for the lowest risk under any outcome.”

The new report, Handbrake Turn, assesses the impact of an IPR in 2025 that is “forceful, abrupt, and disorderly because of the delay”, leading to a sharp fall in oil prices, and how this could affect the value of projects due to enter production from 2019 to 2025.

It uses the IPR initiative’s Forecast Policy Scenario, which models “business as usual” demand for oil growing at 0.6% a year up to 2025. However, the IPR then forecasts a sharp reduction in demand of -2.6% a year from 2025 to 2040 – halving the value (NPV) of oil projects sanctioned beforehand. Conversely, early policy action leads to low but more stable oil prices, giving fossil fuel producers the necessary signals to cut investment and avoid destroying value.

Carbon Tracker analyses 70 of the largest listed oil companies, assessing existing projects and those due to enter production from 2019 to 2025 to see how an IPR would reduce their value compared with what was expected based on prices when they were approved. These value impacts are then used to estimate sensitivity to oil price volatility relative to peers – a risk factor that should lead investors to demand a higher rate of return.

  • Of the oil majors, US companies are most exposed. The value of ExxonMobil’s existing and modelled new oil projects are around 40% more value sensitive than the rest of the oil production industry; ConocoPhillips and Chevron around 20%.
  • European oil majors are more reflective of the industry average in terms of risk, ranging from BP and Repsol with around 10% greater sensitivity, to Shell at the industry average, and Total, Eni and Equinor with around 10% lower sensitivity.
  • Saudi Aramco, a state-oil company with low production costs, is one of the least exposed, around 30% less sensitivity to oil prices than the rest of the industry.

“In our analysis, loss of potential value is driven not by the oil industry throwing money away but simply by investing based on signals sent by the oil price,” the report says. The longer policymakers delay action the greater the risk of stranded assets as companies continue investing to meet perceived demand.

The analysis finds oil companies can deliver the highest returns at the lowest risk by only approving the lowest cost projects. This will not only align them with growing pressure from investors to be complaint with the Paris Climate Agreement, but mean they achieve industry leading margins under any outcome – even if they get smaller overall.

Conversely, companies that pursue high-cost projects will have values that are more volatile under falling oil prices and carry greater risk of destroying shareholder value. “Investors might be expected to demand a higher required rate of return from companies with a higher sensitivity,” the report says.

Carbon Tracker warns that companies can be lulled into a false sense of security by industry scenarios that typically forecast steadily rising demand or by International Energy Agency scenarios modelling a steady decline in demand.

However, an IPR would lead to an abrupt shift and sharp changes in pricing. The report notes that slight imbalances in supply and demand can lead to violent price changes: in 2014-16 a 2% excess of supply caused the oil price to more than halve.

The report says its figures may be conservative and that there could be much greater losses in value than those in its analysis. Using Rystad Energy’s base case oil price scenario, unsanctioned but commercial oil fields expected to enter production in 2019-25 would lose 95% of value under post-IPR pricing.


  • The IPR initiative represents an attempt to understand and model the impacts of policy action to mitigate climate change. It has been commissioned by UN Principles for Responsible Investment with core modelling delivered by Vivid Economics and Energy Transition Advisors.
  • Its Forecast Policies Scenario is broadly comparable with two scenarios published by the International Energy Agency. Up to 2025 oil demand is similar to the Stated Policies Scenario (Previously New Policies Scenario), consistent with emissions policies announced by global governments and is associated with a 50% chance of limiting global warming to 2.7° From 2025-2040 declining demand broadly aligns with the Sustainable Development Scenario (SDS) which is associated with a 50% chance of limiting global warming to 1.65°C.
  • Carbon Tracker assumes that demand will be filled by projects with the lowest production costs and if there is oversupply high-cost projects run the risk of becoming stranded assets.
  • Supply data is sourced from Rystad Energy’s UCube database.

The report can be downloaded here:


To arrange interviews please contact:

Stefano Ambrogi                +44 7557 916940

Joel Benjamin                   +447429637423