News Release

Wood Mackenzie study weighs cost of carbon on upstream sector

EDINBURGH/HOUSTON/SINGAPORE: International natural resources consultancy Wood Mackenzie today releases Positioning for the Future, the first comprehensive study ever carried out into carbon emissions in the upstream oil and gas sector.

Dr Gavin Law, Head of Gas & Power Consulting, Wood Mackenzie, said: “The carbon emissions targets set by the Paris Agreement, together with potential policy changes, are starting to influence investors’ capital decisions and shape companies’ long-term corporate strategies.

“More countries are placing a price on carbon or imposing carbon-related regulations. This increases cost. It has never been more important to understand the value at risk.”

Dr Law said companies active in the upstream sector are keen to better understand what impact climate policies and the move to a low-carbon future could have on their portfolios. He added: “This study is our response.”

The financial markets and industry have focused on how supply and demand for oil and gas, as well as other forms of energy, might change in a low-carbon future. While these indirect effects are important, a perspective on companies’ direct exposure and risk is also crucial. Using data drawn from Wood Mackenzie’s extensive databases of upstream information, Positioning for the Future helpsprovide that perspective.

“As part of the study, we looked at 25 majors, national oil companies and internationally focused large caps,”

Amy Bowe

Director, Upstream Consulting

Amy leads the Upstream Consulting team's Oil Price offering, leveraging our proprietary asset-level Oil Price Model.

Latest articles by Amy

View Amy Bowe's full profile

“The most intriguing finding was that, on the whole, the risk is less than we expected,” added Ms Bowe, Director, Upstream Consulting, Wood Mackenzie.

When assessing regulatory risk, Wood Mackenzie found that the majority of upstream emissions – 64% - are dispersed between countries with a medium-to-low risk of sector-specific carbon regulations.

“As a result, under a $40 per tonne carbon dioxide cost – which we believe represents a realistic average – the value of companies’ upstream assets could be reduced by up to 7%, depending on the regulatory regime,” Ms Bowe said.

“However, we expect this will actually be closer to 2% under the most likely fiscal and regulatory scenario. In this scenario, liquid asset costs would increase by about $0.80 per barrel on average, although the impact could be more than twice that for high-intensity operations.

She added: “Under this most likely scenario, total value at risk would be an estimated $45 billion. This is far less than many expect in terms of the direct impact of carbon costs on company portfolios.”

Another key finding of the study is that gross emissions from the assets examined are growing slightly faster than production, at about 17% to 2025 versus 15% for production.

Ms Bowe said: “This is being driven largely by the higher intensity of primary growth themes - heavy oil, oil sands and liquefied natural gas (LNG). Conventional onshore assets are still the largest single source of emissions and production to 2025, but they represent a declining share in each case.

“In contrast, LNG emissions are forecast to realise the largest – and fastest – absolute increase, with liquefaction emissions also growing at the fastest rate of all the sources, about 43% versus 22% production growth.”

The study also found that asset mix influences a company’s emissions intensity. Portfolio emissions intensities range from 1.8 to 8.0 grams of carbon dioxide per megajoule of production, with the majors having the highest emissions intensity on average, but the least variation as a group, while the large caps are most diverse.