Volatility in investing in oil and gas is nothing new, but the COVID-19 pandemic-driven demand destruction is forcing oil and gas companies to reassess the value of their biggest assets, proven reserves. Oil and gas companies have historically held faith in their reserves even during energy downturns, but this time feels different, and oil executives are starting to prepare themselves for large amounts of their oil and gas reserves to become totally worthless.
Discovering new reserves used to be a major driver of investments, but these costly exploration projects are beginning to be abandoned as they no longer make fiscal sense. Oil and gas majors were already combatting pressure from climate activists, and the pandemic appears to be expediting the shift in strategy. British Petroleum (BP) recently addressed some of these issues by stating “concerns about carbon emissions and climate change mean that it is increasingly unlikely that the world’s reserves of oil will ever be exhausted,” and BP also “expects the pandemic to hasten the shift away from fossil fuels.” The global oil and gas sector is expected to write off $300 billion in assets this year, with that number exponentially increasing over the next decade as world governments become more aggressive and direct with global climate policies.
Assuming emerging climate policies and the pandemic expedite a shift to cleaner energy, fossils fuels appear as if they will remain cheap for the coming years, while emitting carbon will become increasingly expensive. Assuming both assumptions are accurate, many oil and gas fields are no longer economically viable to tap. Rystad Energy believes that about 10% of the world’s recoverable oil and gas, approximately 125 billion barrels, will become obsolete and will further discourage exploration. The more complex the project, the more likely it is to be left behind as the world faces an abundance of oil and increasing doubts about long term demand.