Investors In Oil And Gas Assets Could Be Exposed To Increasingly Higher Risks, Says Study

The ownership of over 43,000 oil and gas assets has recently been traced to reveal who ultimately loses from misguided investments that become stranded. Stranded assets mean a wealth loss for the owners of the assets. Published in the journal Nature Climate Change on May 26, the study has found the US standing top in the list of assets becoming stranded. The basic assumption in the study is a gradual to sharp drop in demand for fossil fuels, which could leave massive investments in trouble.

The report has found that $1.4 trillion in oil and gas assets globally would be at risk of becoming stranded. It is a complex network. It is estimated that total global losses hitting the financial sector—including through cross-ownership of one financial firm by another—from stranded assets in oil and gas production could be as high as $681 billion. Of this, about $371 billion would be held by fund managers, $146 billion by other financial firms and $164 billion could even affect bondholders, often pension funds, whose collateral would be diminished.

U.S. owners have by far the largest exposure. The losses of up to $362 billion could be distributed through the financial system to U.S. investors. The issue matters for the future of net zero efforts for the simple reason that these investors could become a strong lobby against faster transition, ad they seek to protect their investments and profits rather than the future of the Earth, as climate change believers would like to believe. The past record of these firms, especially the largest fossil fuel firms also points to the risk, as they have the ability and resources to fund denialism quite effectively, as we have seen. Moreover, with the wider financial system heavily invested in these firms, the risks could reach all the way to retail investors and savers too.

We can already see how major global funds and banks, by shirking investments into coal mining for instance, are preparing in advance for a transition completely away from coal. In the Indian context, coal, being practically a monopoly and with a clear roadmap for the next two decades and more is protected to that extent. However, even as our exposure to oil and gas investments is relatively low, being a small time producer, the investments being made into gas infrastructure for instance, run a higher than projected risk, for instance if gas is sought to be transitioned out earlier than expected. The $60 billion being invested into city gas infra and related infra, to give just one example, is no small change. India hopes to use gas as a transition fuel till 2050. This, even as countries across Europe and states in the US are effectively seeking to ban gas connections for new homes and buildings.

This matters because even if we stay committed to using gas to use our assets thus created, as a net importer, global markets can turn to make gas much more expensive by shutting down capacity for instance, and in turn, making our infra that much harder to earn money on. Signs are already visible in how the government has finally been forced to bring back subsidies for cooking gas recently. after prices went up to a level where demand destruction seemed imminent.