Development of proven oil and gas reserves by scenario
--- Implications for Upstream oil and gas assets ---
Upstream oil and gas assets can become stranded if existing fields do not operate at as high
a level as originally planned, if they need to be retired before the end of their economic
life, or if a field at which exploration costs have been incurred doe...
s not go into production
by 2035 (the end date of our calculations). There is an important distinction between those
oil and gas fields that are in production today and existing or new fields that, depending on
demand, might be developed (and therefore start producing) at some point before 2035.
Over the period to 2035, the level of production from oil and gas fields that are producing
today is the same in the 450 Scenario and the New Policies Scenario, as their production
remains economically viable in both cases. The investment in many of these fields has
already been recovered and their level of operation largely depends on the optimal
depletion rate and the additional costs associated with continuing production. Thus, the
policies in the 450 Scenario do not introduce significant new risks that currently producing
oil or gas fields will be forced out of operation.
In the case of oil and gas fields that have yet to start production, or have yet to be found, the
lower level of demand in the 450 Scenario means that fewer of them justify the investment
to bring them into production (or to find them) before 2035 (Figure 3.13). This means
that some fields " those that have been found but are not brought into production by
2035; do not start to recover their exploration costs in this timeframe. Relative to the level
in the New Policies Scenario, the additional risk of stranding assets in the 450 Scenario
affects 5% of proven oil reserves and 6% of proven gas reserves, all of which have yet to
be developed. The economic burden of this is relatively limited as, in the case of fields yet
to be developed, the main impact relates to exploration costs (typically around 15% of
investment in a new field) which are not recovered by 2035, at least some of which could
be recovered in the longer term. In the case of fields yet to be found, avoided exploration
and development costs offset the lost potential future revenue opportunity.
Upstream oil and gas sector assets can become stranded for a range of reasons, of which
new climate policies is just one, but our analysis suggests that a companies' or countries'
vulnerability to this specific risk may be greater if their asset base is more heavily weighted
towards those that are not yet developed and towards those that have the highest marginal
production cost (unless its development is driven by broader factors, such as energy security).
Over the lifetime of upstream oil and gas assets, their financial value and economic viability
may be appraised often, including when: a company compiles its accounts' a company takes
investment decisions related to the asset (such as whether to develop a FIeld, which is often
tested under a range of cost-benefit assumptions); and, ownership of the asset changes.
These, and other, reasons may mean that the financial impact of stranded assets is realised
relatively gradually overtitime and across several parties.
While not analysed here in detail, there is also the possibility that assets further
downstream will become stranded, such as in refining, LNG plants and transportation
networks. In the case of refining, over-capacity is already a familiar issue in some regions
and could worsen under a range of scenarios. As oil demand grows in the Middle East and
Asia, these regions have started extensive programmes to expand their refining capacity
both to meet internal needs and supply the export market. Lower utilisation rates, or
permanent shut down, of refining capacity could result in other regions, such as in
Europe and North America, where domestic demand is declining. Within the next decade
some 2 mb/d of refining capacity is expected to be idled due to lack of demand, largely
irrespective of climate change policies. This will affect not only old and inefficient plants,
but also relatively complex facilities that are bypassed by the changing crude and product
trade flows (see the focus on refineries in the forthcoming WORLD ENERGY OUTLOOK 2013). In
the case of transportation systems, some regions have already built additional pipelines
to establish new trade corridors and, given the very long lifetime of such infrastructure,
it is possible that utiisation rates would decrease in some areas in the 450 Scenario,
increasing the risk of stranded assets.