The costs to retire certain assets- asset retirement obligations (AROs)- are typically recorded on the balance sheet and can be the source of significant cash outflows when settled.  Refineries carry hefty AROs, but because of prevailing interpretations of accounting disclosure standards, many refining asset AROs are not included on the balance sheet today.

That said, refineries are increasingly exposed to the energy transition. Declining demand for fossil fuels and increasing growth in cleaner alternative energy and fuels (e.g., the electrification of vehicles) threatens to render refining assets unprofitable and obsolete, forcing the early retirement of these assets.  Nevertheless, refining companies are not “accounting” for the huge demand substitution challenge. The effect of early closures and asset stranding will be ARO acceleration and the incorporation of these significant liabilities onto the balance sheet.

A key question is thus how big these liabilities might be.  Our conservative first order estimate for the six largest listed refining companies in the U.S to decommission their refining assets is $34 billion (versus less than $1 billion recorded today). For each of the six companies, our estimate of total gross costs exceeds 20% of total equity as of FY 2023 year-ends. For two of the companies, the ARO costs would amount to over half of their total equity values. Notably, off-balance sheet AROs for all U.S. oil and gas infrastructure, including facilities and gas transmission and distribution lines, are likely hundreds of billions more.