How oil investors can manage their climate change risk

Do tougher global warming policies diminish investment returns from oil assets, facilities and pipelines? Not necessarily, because not all crude oils are identical.

Tougher greenhouse gas coverage is to become expected over the next several years. Last December at the COP conference in Paris, 196 countries pledged to reduce their carbon emissions. Consequently, governments all over the world are drafting new policies targeted at curbing their GHG emissions.

These new policies, together with climate change concerns, have sparked a debate about the merits of purchasing non-renewable fuels. Not really a week passes without a new headline mentioning a municipality, university, pension fund or religious group who is considering divesting from fossil fuels.

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But climate change policy won’t impact all non-renewable fuels equally. In the case of oil, tighter GHG policies will create chance of some producers, because not every crude oils are made equally. There’s a wide divergence of carbon content in the 93 million barrels of oil and lighter petroleum liquids that are produced every single day.

What could be measured can be managed

Under stricter GHG policy, oil wells that leave less carbon will generally have a competitive advantage, since they will realize greater demand for their lower carbon products and will have lower energy costs.

In general, oil wells with greater carbon intensity C quite simply, more carbon per barrel produced C is going to be progressively challenged with increasing levies over time. The lowest cost barrels will have the best capability to withstand the policy-tightening trend.

To understand how oil assets in their portfolio might be impacted by future GHG policy, investors have to first comprehend the carbon intensity of their specific crude oil asset.

While there’s a wide spectrum of information on the carbon footprints of various crude oils within the public domain ?   including the GHG intensities of everything from California heavy oil to North Sea crude oil ? these are average values. The values do not necessarily represent the emissions from a specific production facility, which could vary significantly from the average.

ARC Financial Corp.’s recently published report  ?  Crude Oil Investing in a Carbon Constrained World  ?  provides investors having a “How to Manual” for estimating the GHG emissions for just about any crude oil asset.

Using the “ARC method” outlined in the report, investors can crunch the numbers to estimate their carbon liability. The calculation uses academic and scientific methodologies that are available within the public domain, including models developed at the University of Calgary and at Stanford University.

Investors can create the data they have to assess risk and return like a purpose of the carbon footprint associated with a crude oil asset. This will assist them to make sure quantify the sensitivity of the investment returns under different carbon policy scenarios. The technique also allows investors to achieve context how their investments rival other crude oil types.

Investors have long had techniques to manage and report risks relating to price volatility along with other externalities to the oil business. Informed oil investors now have a tool to do exactly the same for carbon policy. So what can be measured could be managed.

 Jackie Forrest is Vice President of Energy Research at ARC Financial Corp., Canada’s leading energy-focused private equity finance manager.