The key message of this paper is that oil and gas decommissioning obligations amplify the potential harm from—and could be the spark that ignites—a climate-related financial shock in oil and gas asset prices.
The message is intended for macroprudential regulators focusing on climate-related financial stability risk—e.g., members of The Network of Central Banks and Supervisors for Greening the Financial System (NGFS).
This paper is not intended for climate policymakers and does not address the implications of oil and gas AROs for the energy transition. For example, we do not examine whether and how AROs may thwart the fossil fuel industry’s ability to transition to renewable energy.
- Legal obligations to decommission oil and gas infrastructure assets (e.g., wells, pipelines, and refineries) amplify the potential harm from—and could be the spark that ignites—a climate-related financial shock in oil and gas asset prices.
- Oil and gas decommissioning obligations are large. Our first-order estimate to decommission existing oil and gas infrastructure in the U.S. alone exceeds $1.2 trillion. Total costs globally could be four times as large.
- Opaque accounting and disclosures obscure the uncertainties associated with these obligations and their contribution to systemic risk, making them a possible “black swan”.
- Systemic risk analyses have focused on the potential for a sudden devaluation of oil and gas financial assets but overlooked decommissioning liabilities. More study of this topic is needed