Regulatory affairs- Stranded assets: Real issue, or just another narrative?

The topic of stranded assets is one that oil and gas opponents have attempted to bring into wide acceptance in the financial community and among policymakers in recent years. Basically, the argument goes that the world is in the process of rapidly moving away from the use of oil, natural gas and other fossil fuels, which are to be replaced by electric vehicles and renewable energy. Proponents claim that this “energy transition” will take only a few decades, resulting in a significant portion of the current reserves held by oil and gas producers being forced to remain in the ground, thus becoming “stranded assets.” 

It's an interesting theory, but is it valid? Energy-related developments and events, thus far in 2023, indicate the answer to that question is an emphatic “no.” 

Let’s take a look at some of those developments.  

Projections of rising global demand. The first reality to consider is the growing consensus among the expert class that global demand for oil and related products will continue rising for a long time:  

• Global demand for crude oil and natural gas continues to rise inexorably, despite all the “stranded asset” and climate emergency rhetoric. The world set records for consumption of oil, natural gas, coal and even wood, for energy generation in 2022. Global demand for crude oil rose by more than 2 MMbpd in 2022, despite a drop in Chinese demand of about 400,000 bpd, due to its mass Covid shutdowns, Fig. 1.  
• Demand for all these products is projected to set new all-time records again in 2023, coming mainly from developing nations. 
• There is a growing consensus that demand for crude oil will continue rising for decades. Even the International Energy Agency (IEA), which has historically and systematically underestimated demand for oil and gas, now projects demand for crude to rise through 2040 before embarking on a very gradual drop over several decades. 
• Other legitimate forecasts project crude demand rising through 2050 and beyond.
• Even Secretary of Energy Jennifer Granholm, who has made a habit of stating that she wants to see use of oil disappear in a decade, acknowledged during this year’s CERAWeek conference in Houston that we would still be consuming significant volumes of oil in the 2050s and beyond, Fig. 2.  
• These outlooks for rising demand, for decades to come, bely the notion of a big portion of currently defined reserves becoming stranded assets in just a few years.

Fig. 1. Use of crude oil and natural gas continues to rise inexorably. There was record consumption of oil in the form of refined products like gasoline during 2022. Image: Sunoco.

In March, the Biden/Granholm Energy Information Administration (EIA) released its new Annual Energy Outlook.  In this outlook, the EIA makes the following forecasts: 

• U.S. total energy production will increase 19% from 2023 through 2050. 
• U.S. oil production will rise 11% through 2050. 
• U.S. natural gas production will jump 15% through 2050.   

Fig. 2. Despite her habit of stating that she wants to see use of oil disappear in a decade, even Secretary of Energy Jennifer Granholm acknowledged during this year’s CERAWeek conference in Houston that the world would still be consuming significant volumes of oil for several decades. Image: U.S. Department of Energy.

It is key to note here that the EIA’s projections factor in the impacts of the more than $600 billion in green energy subsidies, contained in last year’s Inflation Reduction Act, and the Bipartisan Infrastructure Law enacted in 2021. Given that the average lifespan of a newly drilled oil and gas well is estimated between 20 and 30 years, these are not projections that support the notion of any significant percentage of current oil and gas reserves going unproduced. 

Investment decisions are key indicators. It’s important to note that narratives about stranded assets invariably originate from left-wing activists, who are heavily invested in efforts to regulate and legislate fossil fuel usage out of existence. Every article and editorial that make their way into mainstream corporate media platforms do not reflect the views of the industry or investment community at large; rather, they simply reflect the views that repeat within the echo chambers of the political left. 

Few of the “experts” quoted in such articles and papers possess even a basic understanding of the oil and gas industry or its investment or capital expenditure arms.  What we see, instead, are talking points and rationalizations, justifying a disbelief in what is happening in the real world today and what real experts project will happen in the future. 

Management teams at oil and gas companies invoke long-term, multi-billion-dollar investment decisions based on keen, comprehensive analyses of current and future energy needs. If these teams truly believed their businesses were dying and that a large portion of their current proven reserves are destined to become stranded assets, we would already be witnessing a systematic winding down of their core business of finding and producing oil and gas. 

To the contrary, the big producers and consumers of oil aren’t investing in a way that indicates any real acceptance of the stranded assets arguments. In late March, Saudi Aramco inked new deals with Chinese interests that would increase its crude supplies to China by 690,000 bopd and which represent investments totaling a projected $80 billion. India has, in recent months, become the largest consumer of Russian crude, and it also has entered into new agreements for increased oil supplies from Saudi Arabia and other Middle Eastern oil producers. 

BP’s recent announcement that it is implementing a new focus on growing its own oil production is another indication of rejection of the “stranded assets” theory (Fig. 3), as are similar ramped-up drilling and exploration budgets being implemented by ExxonMobil, Chevron, Shell and almost every other big producer of oil and gas globally. At the same time, many of the same companies are investing heavily in big carbon capture, usage and storage (CCSU) projects, from  which one main benefit will be to make their core oil and gas businesses more sustainable in the future.  

Fig. 3. Exemplified by this tow-out of the Argos production platform into the Gulf of Mexico during September 2021, bp is implementing a new focus on growing its own oil production, another indication of rejection of the “stranded assets” theory. Image: bp.

Additionally, ExxonMobil completed a major, 250,000-bpd expansion of its already-huge refining operation in Beaumont, Texas. This expansion is the equivalent of opening a major new refinery—not the sort of investment decision that would be made by a management team expecting the company’s business to be largely over in just a decade or two. 

Few—if any—CEOs in the oil and gas industry lose sleep at night over the risk of stranded assets. In reality, one of the biggest current challenges facing upstream companies is raising the capital needed to invest in the finding and development of new reserves to meet what they know will be steadily rising global demand, Fig. 4. 

Fig. 4. As global demand increases further, and operators strive to develop new reserves, one of the biggest challenges facing them is raising the capital needed to invest in the finding and development of new reserves. Image: Pioneer Natural Resources.

Even the Biden administration tacitly acknowledged the realities of future demand growth when it decided in March to move forward with the Willow project—an $8 billion project in Alaska that ConocoPhillips projects will ultimately produce up to 185,000 barrels per day of additional U.S. supply, Fig. 5. This is a big project with a long timeline, from which first production is anticipated to take place no sooner than six or seven years into the future, and which will be capable of producing significant oil for 30 years or more. 

Fig. 5. Future demand growth figured into ConocoPhillips’ pursuit of, and the Biden administration’s final approval of the Willow project. The $8 billion project in Alaska has a long timeline, will produce up to 185,000 bopd, should take six or seven years to develop, and is likely to produce significant oil for 30 years or more. Map: ConocoPhillips.

The stranded assets argument is also being quietly rejected by so-called “ESG-focused” investor groups like BlackRock, whose CEO, Larry Fink, has been quoted recently as saying his firm will increase its investments in new fossil fuel projects.  

Policymakers in other nations of the Western world, who have invoked programs designed to subsidize a rapid “energy transition” away from fossil fuels and towards renewables, have recently been quietly reversing such policies. Germany has rushed to restart mothballed natural gas and coal plants and has even reactivated coal mines over the past year. Canada has moved to approve new LNG export facilities despite Premiere Justin Trudeau’s statements last fall that “no business case” exists for such facilities in Canada today. 

The UK also has reactivated its gas and coal plants and increased imports for both. Italy has entered into new gas supply arrangements with North African nations and ramped up its own crude oil imports, and Japan also has embarked on building more fossil fuel power generation and increased imports. The list could go on for pages. 

The bottom line. Simply put, an analysis of the actual decisions being made in the global energy space today reveals the stranded assets narrative to be little more than an ill-supported set of talking points, deployed by anti-fossil fuels activists. While some in the industry continue to pay lip service to that narrative, discussions at this year’s WEF, CERAWeek and other major conferences have revealed a re-dedication to increased exploration and development of new oil and gas reserves. The real investment and strategic decisions being taken by the big players in the energy business and investment communities reveal little belief in the stranded asset narrative.