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March 2021
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Analysis: Stranded assets could leave fossil fuel producers high and dry

Fossil fuels
By Paul Mackintosh   
February 24, 2021

A new Fitch Ratings report titled “Climate Change ‘Stranded Assets’ Are a Long-Term Risk for Some Sovereigns” warns that…well, you read the title. It cites global policy initiatives to cut greenhouse gas emissions, combined with shifts in social attitudes and behaviour, and the continuing fall in the price of renewable energy, as the broad trends behind the risk. The result of all this, it predicts, will be a continuing decline in demand for, first coal, then oil, then gas, over the next few decades. This will lead to pools of hydrocarbon reserves, and the associated exploitation and production infrastructure, left high and dry as the so-called stranded assets, never to be fully utilised or exploited, and in some cases, never to earn back the money put into them.

The report cites forecasts by the United Nations’ supported Principles for Responsible Investment and associated initiatives of a drop in coal output to 15% of its current level by 2050, 52% for oil, and 88% for gas. The effect on some countries could be devastating. Quoting 2019 figures, Fitch cites the Republic of Congo, with some 45% of its entire gross domestic product dependent on oil exports. Kuwait is not far behind, with combined oil and gas exports contributing some 41% of its GDP. For Iraq, the share is 32%; for the United Arab Emirates, around 27%; and for Saudi Arabia, around 22%.

Meanwhile, according to the ratings agency’s figures for 2019 derived from BP, renewable energy sources already contributed over 10% of global power generation – and this was before the impact of the coronavirus pandemic. Mark Carney, the former chair of the international Financial Stability Board, warned as far back as 2015 that a carbon budget which actually delivered the Paris climate accord’s 2°C target would leave the vast majority of the world’s hydrocarbon reserves as too expensive to burn – unusable without extensive, and expensive, carbon capture technology.

Fitch is therefore citing the sovereign risks to those major fossil fuel exporters. Most of the Middle Eastern countries at least have a high potential for diversification, which may limit the ensuing damage to their sovereign ratings. But it hardly says much for them or their ilk as safe investment harbours.

Once again, hard economics and technology are pointing to the dire future associated with any involvement in fossil fuels. It’s time for investors to disengage, not only from fossil fuel assets, but even from the countries that continue to depend on them. Exposure to fossil fuels is a losing bet: for investors, for the human race as a whole, for the planet – and last but not least, for the producers themselves.