Today, 38 countries are taxing or trading carbon and a further 78 plan to do so as part of their Paris Agreement commitments. Despite this, we seem to be a long way off from developing any kind of global carbon price.
We see only 35% of global carbon emissions from upstream oil and gas assets between 2016 and 2025 arising in countries with a high or even extreme upstream carbon policy risk. (In other words, where the government would be both willing and able to impose a cost associated with carbon emissions from the upstream industry.)
In the absence of a global carbon price and using what we believe to be the most likely fiscal and regulatory treatment in each country, even at US$90/tonne the impact on total upstream asset value is below 4%.
Even when a carbon price is applied universally – and, in the most extreme case, we assume there is no offset against any corporation or production-related taxes – then it is only beyond US$60/tonne that the value at risk rises above 10%.
How do companies and assets compare?
The aggregate picture masks a substantial variation between companies and across their assets.
The percentage value at risk associated with a given carbon price is impacted by three factors:
- The emissions intensity of assets
- The existing profitability of each production stream (that is, the remaining NPV10 per boe)
- The policy risk associated with the countries of operation (in other words, how likely a carbon cost is to be implemented in each country where production occurs).
Our asset-by-asset emissions forecasts can be used to drill down. For instance, in which countries, or in which resource themes or assets, are the different companies most exposed to financial risk from carbon? How does the value at risk for the largest oil and gas companies compare?
Adopting a US$40/tonne carbon cost and using a likely tax and regulatory scenario, we see the corporate (upstream) value at risk among the 25 companies ranges from 1% to 4% (see chart below).