Do tougher climate change policies diminish investment returns from oil assets, facilities and pipelines? Not necessarily, because not every crude oils are the same.
Tougher greenhouse gas coverage is to be expected within the next several years. Last December in the COP conference in Paris, 196 countries pledged to lower their carbon emissions. Consequently, governments all over the world are drafting new policies aimed at curbing their GHG emissions.
These new policies, along with global warming concerns, have sparked a debate about the merits of purchasing non-renewable fuels. Not a week goes by with no new headline mentioning a municipality, university, pension fund or faith based group who’s considering divesting from non-renewable fuels.
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But global warming policy will not impact all fossil fuels equally. When it comes to oil, more stringent GHG policies can create opportunity for 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 tend to have an aggressive advantage, given that 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 will be progressively challenged with increasing levies over time. The cheapest cost barrels may have the greatest ability to withstand the policy-tightening trend.
To know how oil assets within their portfolio could be impacted by future GHG policy, investors need to first understand 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 in the public domain ? including the GHG intensities of everything from California heavy oil to North Sea oil ? these are average values. The do not really represent the emissions from a specific production facility, which could vary significantly in 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 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 generate the data they have to assess risk and return like a purpose of the carbon footprint of any oil asset. This can enable them to test and quantify the sensitivity of the investment returns under different carbon policy scenarios. The method also allows investors to achieve context on how their investments compare to other crude oil types.
Investors have long had methods to manage and report risks relating to price volatility and other externalities towards the oil business. Informed oil investors now have a tool to do exactly the same for carbon policy. So what can be measured can be managed.
Jackie Forrest is V . p . of one’s Research at ARC Financial Corp., Canada’s leading energy-focused private equity finance manager.
