Crude Oil Investing in a Carbon Constrained World: 2017 Update

Executive Summary

Since its publication in February 2016, investors have used the ARC Method to understand how their crude oil assets compare to others on a carbon intensity basis and to quantify the cost of future policy on their investment returns. In the absence of a method for measuring greenhouse gas (“GHG”) emissions, investors in crude oil assets are largely unaware of the financial costs they face if more stringent climate change policies are introduced.

This update to the original ARC Method expands the list of available benchmark crude oils and incorporates new data and models. The list of benchmark crude oils has been expanded from 33 to 75, including estimates for US onshore plays like the Bakken and Eagle Ford. The updated ARC Method also incorporates new data and models, and updates the baseline for the US Refined Average from 2005 to 2014.

Using the ARC Method, investors can identify crude oil assets that can make attractive returns under a realistic range of carbon prices, while avoiding higher carbon assets that are more challenged by carbon levies. Because of the risk of more stringent GHG policy, some organizations, agencies, and individuals are suggesting that crude oil investors are being exposed to excessive financial risks. This is not always the case. Crude oils are not all equal in their carbon intensity. In the future, producers with lower carbon emissions could realize positive benefits compared to their higher carbon peers, such as higher demand for their products, lower energy use, and reduced operating and carbon compliance costs.

Beyond the benefits of using the ARC Method to understand and quantify investment risk, there are additional benefits from understanding GHG intensity for crude oil investing. By gathering data and modelling the GHG intensity of a crude oil operation, an investor can gain a greater awareness of the characteristics that lead to higher GHG intensity. Awareness of these dynamics should lead to better decisions on future investments; either by avoiding assets that are more challenged, or by making decisions early in a project’s design that reduce the GHG intensity for relatively low cost (compared to making a change later in a project’s life).