Document summary
Under a global climate deal consistent with a 2°C world, Kepler Cheuvreux estimates that the fossil-fuel industry would stand to lose USD28trn (in constant 2012 US dollars) of gross revenues over the next two decades, compared with business as usual. The oil industry’s increasingly unsustainable dynamics mean that stranded-asset risk exists even under business-as-usual conditions: high oil prices will encourage the shift away from oil towards renewables (whose costs are falling) while also incentivising greater energy efficiency. Ongoing negotiations in preparation for COP-21 next year are only likely to increase the pressure for greater transparency on carbon risk. Against this backdrop, the author thinks investors need more details on the breakdown of oil companies’ assets by project type and on their capital-allocation processes in order to be able to better assess carbon risk and cost/revenue risk. The report concludes that there is an opportunity for the oil industry to engage in a transparent dialogue with investors on the carbon risks it faces and thus provide a transparent stress test of its business model against potential future climate-policy scenarios.