Price volatility, a changing financial environment and strengthening policy to mitigate climate change mans that there is a “heightened risk” for oil and gas investors, according to a report from thinktank Chatham House.
The report argues that there is a current mismatch in Chinese demand of oil, which I currently static and expected to fall in the future, and growing US supply. Uncertainty on demand and prices, coupled with increasing climate regulation, could result in “heightened commodity risks”.
Investment in fossil fuel supply is subject to uncertainty about when stronger climate change policies will emerge and how strong they will be. World leaders will meet in Paris in December to discuss a universal climate change treaty. It is hoped that an agreement that will limit global temperature rise to 2C will be made.
The outcome of the UN summit will be crucial for fossil fuel companies and their shareholders.
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The organisation also notes that oil and gas reserves are not the only investment assets that will be “in limbo” because achieving the greenhouse gas emission reduction needed to limit climate change requires re-engineering every aspect of the global economy.
The paper concludes, “[The analysis] suggests that in the short and medium term, financial strategies will have a critical part to play in dealing with the mismatches that result from these developments.
“In the longer term, the climate negotiations of December 2015 will boost momentum for policies that will depress global demand for fossil fuels. This momentum will draw on political commitments embodied in the US-China agreement on climate change cooperation and on parallel commitments by the EU.”
It continues, “The policies under discussions, which aim at controlling and reducing emissions by fossil fuel users, drive a wedge – a large differential – between the costs incurred by consumers to use energy (or to avoid using it) and the prices that fuel producer charge. Although the age of cheap oil production may not yet be over, the age of cheap oil use is coming to an end.”
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