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Chevron devaluation comes amid broader climate-related market impact concerns

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Chevron on Dec. 10 said it will write down $10 billion to $11 billion in assets primarily due to lower long-term expected natural gas prices.
Source: AP Photo

Chevron Corp.'s recent devaluation of up to $11 billion in U.S. assets happened at a time when investors and analysts are questioning whether major oil and gas companies could have stranded assets in the future due to climate-related risks.

Chevron said Dec. 10 that it will write down $10 billion to $11 billion in assets, primarily its gas shale assets in Appalachia, but also regarding the Kitimat LNG project in Canada, the Big Foot offshore oil project in the Gulf of Mexico and other unnamed gas projects around the world. The move appears to be primarily linked to a glut of natural gas and related low commodity prices in the U.S. but also is happening as demand for more zero-carbon generation such as wind and solar is on the rise.

Given that the world is not curbing overall emissions enough to slow the pace of global warming, experts have suggested that the number and intensity of climate-related regulations will increase significantly over the next 10 years as countries and local governments scramble to achieve the goals of the Paris Agreement on climate change. A number of recent reports have suggested that those regulations will, in turn, hurt the bottom line of companies that have not transitioned away from carbon-intensive portfolios.

One group putting forward this argument is the U.N.-backed Principles for Responsible Investment, which has more than 2,300 investor signatories. The group recently found climate change-related policy changes could wipe between $1.6 trillion to $2.3 trillion off the value of major global companies by 2025. Moreover, the 10 largest companies in oil and gas exploration and production would lose nearly a third of their current value.

Meanwhile, some institutional investors have already started reducing their holdings in oil and gas producers. In the third quarter of this year, Chevron, for example, saw a net decline of 8.1 million shares held by institutional investors.

And in the last day or so, analysts at Goldman Sachs Equity Research and Fitch Ratings warned of potential climate-related ramifications for carbon-intensive industries.

Capital markets are taking a leading role in funding the energy transition while severely tightening financing for new hydrocarbon assets, which is "leading to a new age of capital constraint" across the hydrocarbon industry, Goldman Sachs wrote in a Dec. 11 report titled "Carbonomics: The Future of Energy in the Age of Climate Change."

Those tightening financial conditions for new oil and gas developments have triggered more consolidation and higher barriers to entry into traditional oil and gas markets while increasing the equity risk premium on new long-cycle developments, the Goldman Sachs paper said.

"We believe it is strategically imperative for Big Oils to transform into Big Energy, in line with the global ambition to contain climate change," the paper said. The analysts went on to suggest that big oil companies have the ability to take a much bigger role in the low-carbon transition in the areas of electric vehicle charging, renewables, biofuels, petrochemicals, nature-based solutions, and carbon capture and sequestration.

Economists with the National Bureau of Economic Research, or NBER, in a November paper made a similar observation regarding valuation concerns for North American producers but focused primarily on undeveloped fuel reserves.

NBER's Christina Atanasova, a co-author of the paper, in an interview, explained that undeveloped oil reserves are those that are expected to be recovered but have yet to be drilled or are at existing wells and would require a major expenditure and more time to extract compared to already developed sites. The NBER economists found that the valuation of fossil fuel firms is being negatively impacted by growth in undeveloped reserves due to market expectations about climate policy risk.

In other words, "if you are growing your reserves you will already have lower value today," Atanasova said. She added that smaller firms will be the hardest hit. The paper also said that "high level of institutional ownership, stock market liquidity and analyst coverage do not change the negative effect of undeveloped reserves growth" on an oil firm's value.

For its part, Fitch in a Dec. 12 note suggested that for facilities manufacturing carbon-intensive commodities such as steel and cement, "governments have been helping to mitigate direct and indirect costs of carbon, but older and inefficient plants will increasingly struggle to obtain support."

"In the meantime, pressure for carbon reduction is likely to erode financial support," the report said. The Fitch analysts suggested that Canada, Japan, South Korea, Mexico, South Africa and the EU are expected to see a significant fall in free carbon allowances by 2023. "The effects on the bottom line for companies will ultimately depend not just on carbon pricing but net allowances," the Fitch paper said.