NEWS
While the recent cyclones in Mozambique and the Bay of Bengal grabbed headlines for their impact on oil and gas companies, it’s easy to overlook the influence of carbon regulation on the sector. Governments across the globe are in the process of imposing more stringent regulations to mitigate the effects of climate change; identifying the risks associated with these policies, known as transition risk, is vitally important to operators as the world moves towards a low carbon economy.
Over 50% of global reserves sit within countries considered ‘high risk’ by our Carbon Policy Index, which scores 195 countries on their potential to step up greenhouse gas emissions reduction policies.
Applying the index to our Corporate Exposure Tool (CET), which draws on our sister company Wood Mackenzie’s commercial data on global reserves, assets and companies, we can see that operators in the oil and gas sectors in the Americas, Europe and Oceania are most exposed to risks from national carbon policies.
Most countries in these regions are classified as ‘high risk,’ but pockets of ‘extreme risk’ jurisdictions do exist. The highest risk oil and gas producing countries are Norway (4th highest risk overall), Austria (5th), New Zealand (6th) and South Korea (7th). Here, the risks are higher that future costs and compliance burdens for investors and operators will rise. In the worst-case scenario, this could entail assets being left stranded if they are too costly to extract.
Overall, our analysis shows that global transition risk is largely clumped together: relatively little global production is located in low or extreme risk countries (see figures below). This is because while most of the world has ratified the Paris Agreement, few countries have committed to the ambitious action needed to meet the accord’s stated goal of limiting global warming to 2°C. Most oil and gas companies will encounter risks of some degree of policy intervention, but the majority of reserves are found outside of the most stringent jurisdictions. There are also lower carbon policy risks in frontier exploration countries in Africa, reducing entry risk for operators in those locations.
There are lower transition risks in African frontier economies. All African countries have set BAU emission reduction targets that allow their economies – and overall emissions – to grow and very few have passed legislation to decouple emissions from economic growth. Weak governmental institutions and ineffective governance mean this situation will not change in near future.
Most countries in Europe, the Americas and Oceania have climate legislation in place, binding targets that reduce emissions in real terms, and carbon pricing initiatives. In many of these jurisdictions, we expect regulations to tighten; however, these measures can also be rolled-back.
The United States (38th) ‘is currently classified as high risk in the index, but this will shift if it officially withdraws from the UN Paris Agreement in 2020 as planned. This will change the index’s global risk landscape by removing around 20% of global reserves from the highest risk categories, as the US is reclassified as a medium or even a low risk country.
The risk profile in Oceania is also set to change. Following the Coalition’s re-election in the May 2019 Australian federal election, we expect the government to pursue more lenient carbon emissions reduction targets throwing the future of carbon pricing in Australia (35th) into uncertainty.