Crude Oil Investing in a Carbon Constrained World

Executive Summary

Investors in crude oil assets are largely unaware of the risks they are being exposed to under more stringent climate change policies. Growing concerns around climate change are likely to result in new policies to reduce greenhouse gas (GHG) emissions. As a result, crude oil producers are likely to face increasing costs for complying with new regulations. Due to a lack of information, a consistent, accessible, and widely adopted method for measuring the GHG intensity of crude oil assets and their associated carbon liability does not exist.

Macroeconomic and environmental factors over recent years have led to concerns around the risks associated with crude oil investing. Because of these concerns, especially those related to GHG emissions, some organizations, agencies, and individuals are suggesting that crude oil investors are being exposed to excessive risks of product obsolescence, and that divestment is the only option to mitigate risk. We suggest this is not the case. What can be measured can be managed, especially in the case of GHG emissions.

In this report, investors are introduced to the ARC method for assessing, reporting and comparing the GHG intensity of crude oil operations. Using the ARC method, investors can evaluate how more stringent GHG policies could impact their investment returns, allowing investors to rationally assess their oil investments in a carbon constrained world.

Although the investment returns on some crude oil investments are challenged by more stringent GHG policies, the authors have found that many investments can continue to make attractive returns under a realistic range of carbon prices. Not all impacts of potential carbon policy will be negative to oil companies and their investors. Producers that have the ability to reduce their carbon emissions could realize positive benefits, such as higher demand for their products, lower energy use and reduced operating 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 modeling 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 a relatively low cost (compared to making a change later in a project’s life).