Carbon Tracker’s fundamental insight is that the oil and gas industry’s growth plans do not fit in a low carbon world.
As such there will likely be fierce competition to meet dwindling demand for hydrocarbons—making production costs a key indicator of future viability.
The risk is captured in the term “stranded assets”. But there is a flip side to stranded assets, and that is stranded liabilities. Among those are the cost of retiring production infrastructure in accordance with environmental law and the risk that these liabilities will become stranded along with the assets.
Unlike most sectors, oil and gas companies are legally obligated to decommission their assets in accordance with environmental standards at the end of their productive lives, and accountants call these liabilities “asset retirement obligations” (AROs).
- Laws require that oilfield assets must be properly “retired” at the end of their productive life to protect human health and the environment.
- When assets become stranded due to excessive production costs, retirement costs are accelerated.
- The costs to retire America’s idle and aging oil and gas infrastructure are already exceeding industry resources, and the energy transition will dramatically accelerate the shortfall by forcing the entire industry into premature retirement.
- Oil and gas companies have no retirement savings, leaving governments and taxpayers to pick up any shortfalls.
- Regulators are waking up to this reality, forcing companies to pony up more financial assurance for retirement, thereby increasing production costs and causing oilfield assets to become stranded sooner and more often.