Oil & Carbon Revisited: Value at Risk from 'Unburnable' Reserves

Paul Spedding, Kirtan Mehta and Nick Robins

Research Organisation

Report Date
Jan. 25, 2013

Document summary

The IEA?’s World Energy Outlook (2012 edition) estimated that in order to have a 50% chance of limiting the rise in global temperatures to 2oC, only a third of current fossil fuel reserves can be burned before 2050. The balance could be regarded as ?‘unburnable?'. To assess the risk for the oil & gas sector, HSBC assumes in this report that the world is already low carbon and undertakes a ceiling test on the future projects of the larger European majors covered by HSBC to assess the potential value at risk. Using USD50/b for oil and USD9/mmBtu for gas for the ceiling test, oil and gas volumes at risk range from under 1% (BG Group) to 25% (BP). However, as a percentage, the value of reserves at risk is lower than this because they are largely undeveloped. The value impact ranges from under 1% (BG Group) to 17% (Statoil). The report concludes that because of its long-term nature, HSBC doubts that the market is pricing in the risk of a loss of value from this issue. They think investors should focus on low-cost companies like BG; a gas bias is preferred, which would favour Shell.