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“Stranded Assets”A new challenge in energy investing
Jim JubakJubakPicks.com (free)
JubakAM.com (subscription)jubakspicks@gmail.com
Author of Juggling with Knives (order at Amazon.com)
My new book on volatility
Just what you need: a new challenge in energy investing
• Just when we’re trying to figure out when oil and gas prices will rebound
• Just when we’re trying to figure out when global oversupply will end
• Just when we’re trying to figure out the extent of any rebound—oil at $45? $65? $75? Will we ever see $100 again?
What’s a stranded asset?
• It’s all about global climate change• If the world is to keep the increase in
global temperature to the 2 degrees C agreed in Paris, then the world cannot burn all discovered deposits of carbon fuels
• Some percentage will have to stay in the ground—as stranded assets
Why take “stranded assets” seriously?
• Because the oil Industry—well some parts of the oil industry—does
• ExxonMobil (XOM) has begun publishing a carbon risk report looking at effect on value of reserves
• Because Wall Street is starting to• BlackRock November report “Price of
Climate Change”
But no consensus on how much will be stranded
• Royal Dutch Shell says NONE— assumes 6 degree increase in global temperature
• International Energy Agency says $300 billion with coal use peaking in 2015 and oil use in 2020—the new “Peak Oil”?
• Carbon Tracker and Grantham Institute on Climate Change at LSE say 60% to 80% of reserves unburnable--$20 trillion in assets
Big problem: Decision on how much to burn is political
• World could decide to do nothing—except talk—in which case Shell is right
• World could decide to do everything—in which case Carbon Tracker is right
• Or the world can decide to muddle through (BlackRock)—most likely scenario
Under a muddle through scenario (BlackRock)
• High degree of uncertainty is itself a market trend—cost of capital up for assets with most perceived risk
• Most perceived risk to high cost/high carbon assets
• Canadian tar sands, non-U.S. and non-authoritarian fracking, extreme high cost deep water projects (Petrobras?)
Time frame risk
• The longer it will take to get a project running, the more uncertainty and higher capital cost—Arctic E&P? (Statoil STO and Russia?)
• Projection of when the curves of time to develop and action on carbon might meet—2020 is date that seems to come up on lot on both timelines
Is a “stranded asset” scenario priced in?
• BlackRock (world’s largest asset manager) says NO
• Concluded in November 2015 No evidence of risk premium for stranded asset scenario to date
More on volatility in my book
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