Investors should consider the implications of future carbon constraints on the global oil industry, according to new analysis from ratings agency Standard & Poor’s and the climate change risk outfit the Carbon Tracker Initiative.
The analysts argue that an increasingly “carbon-constrained” world could pose a serious challenge for the oil industry, given evolving government climate policies, uncertain future oil prices and rising operational costs.
The findings follow research by HSBC in January looking at the implications for coal, oil and gas equities.
The warning comes as Royal Dutch Shell has outlined a scenario whereby solar energy becomes the dominant energy source by 2070. And just today, the company’s Japan subsidiary Showa Shell announced a deal to build a 21MW solar plant in western Japan.
“Bringing in emissions ceilings has clear implications for the future fundamentals of the sector – demand and price,” said Carbon Tracker’s research director, James Leaton.Uncertainty about the future of carbon intensive fuels needed to be translated into the credit analysis of business models, he argued.
And Michael Wilkins, S&P’s head of environmental finance, argues that financial models that only rely on past performance and creditworthiness are an “insufficient guide for investors”.
He said the study – ‘What A Carbon-Constrained Future Could Mean For Oil Companies’ Creditworthiness’ – shows a deterioration in the financial risk profiles for smaller oil companies that could lead to negative outlooks and downgrades. But the effect on oil majors “would be more muted”.
The study looked at three Canadian companies in the unconventional oil sector (Canadian Oil Sands Ltd., Canadian Natural Resources Ltd. and Cenovus Energy) and BP and Shell.
“S&P’s report is very welcome in helping us to identify where the risks lie within the global oil sector, and ensuring that they are integrated into our investment analysis,” said Vicki Bakhshi, Associate Director at F&C Investments.