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Page added on March 4, 2015
Stranded Assets in Oil and Gas a Reality
Just a few short years ago a friend called me to chat about the possibility of stranded assets in oil and gas due to climate change and the expected legislation and new regulations that would entail. This was an interesting idea coming out of the UK at the time. Since then, the idea has gained more and more traction. What is starting to emerge, however, is that stranded assets in oil and gas are not going to happen merely because of climate change. It is happening as we speak because a number of potentially disrupting events are all converging on one point: our use of hydrocarbons. Some of the challenges are due to climate and some are not. What is clear, however, is that they are multiplying. Though climate change will no doubt prove to be one aspect of stranded assets, others will include a simple but powerful realization that there are simply better places to put your investment dollars…or euros…or yuan.
So what are these potentially disrupting events? Let’s start with just one.
We’ve all heard of the compound effect and how it can beneficially impact our investments. What we don’t hear as much is what it can do detrimentally as well. Because the compound effect doesn’t just work on investments. It also works on every aspect of your life. If you choose to add desserts to a couple of meals a week when you never ate dessert before, chances are that you will gain weight. It won’t seem a big deal at first. You won’t even notice it but then one day you will wake up and “somehow” you’ve gained five pounds. Something similar is happening with the alternative energies of wind and solar. While most of us were not paying attention, they were quietly adding capacity to the grid. While we were incessantly fixated on the “shale revolution” they were streamlining manufacturing processes and the costs were plunging. Even now there are those oil and gas apologists who knowingly smile and make smug pronouncements about wind and solar only accounting for a minuscule part of the overall system…and to some extent they are right. But what they have not realized is that even though the alternative energies are currently a small portion of the overall grid, they are already economically competitive! In fact, wind is now the cheapest form of electricity generation in the US and many other places globally on a levelized basis. And yes, this is without subsidies. Solar is expected to be competitive with wind in the next 18 months to two years and yet, these technologies have not reached scale. Imagine the possibilities then. UBS in a March research note stated:
“Solar is no longer necessarily an ‘alternative’ energy – and we expect the investor base to reflect this in the coming year.”
First Solar and SunPower recently announced a joint yieldco and investors were so enthusiastic that both stocks surged 10% and 18% respectively. A yieldco is a new form of investment vehicle which is essentially the alternative energy industry’s equivalent of a Master Limited Partnership which oil and gas uses extensively. Instead of selling off their solar assets to power providers which has been the typical model in the past, these solar companies will now keep them on their books. Why would this be attractive to investors? Because the proposed solar plants could generate as much as $2.8B over their life time. Further, Bloomberg calls it a “low risk opportunity for investors”.
Once investment potential is truly recognized in these new energy producers, as is happening currently, much more money becomes available. The fact that both wind and solar are already competitive with natural gas and coal fired generation will make the dynamics change very quickly. That is when the tipping point is reached and assets that once supported oil and gas and coal will shift into supporting wind and solar. There are good indications that this has already been occurring given the poor share performance of shale companies during the shale revolution and the dismal outlook for coal. Most of the top shale operators in the very best plays have not been able to match the returns of the S&P 500 index and solar shares have often outdistanced them by multiples.
So hang on for the ride. We appear to be entering a new era of wealth creation. And stranded assets in oil and gas could truly become the next Kodak moment.
32 Comments on "Stranded Assets in Oil and Gas a Reality"
rockman on Wed, 4th Mar 2015 7:58 am
‘A yieldco is a new form of investment….Instead of selling off their solar assets to power providers…these solar companies will now keep them on their books. Why would this be attractive to investors? Because the proposed solar plants could generate as much as $2.8B over their life time.”
Well, da! LOL. I wonder if they understand how Texas has become one of the global leaders in wind power? Folks will invest capex much more readily to make a profit then to save the environment.
shortonoil on Wed, 4th Mar 2015 8:40 am
We have been talking about the up coming stranded assets in the petroleum industry for a few years. We have even made a few posts here about the problem. The long term decline now taking place with oil prices will be the driving force that produces losses from the industry’s assets. Depletion is the driving force behind that price decline:
http://www.thehillsgroup.org/depletion2_022.htm
By the time the 2030-2035 dead state window has been reached, our estimates place the asset loss to industry, and the general economy at $88 trillion. It appears doubtful that any existing monetary, financial system will be able to survive losses of this magnitude!
http://www.thehillsgroup.org/
Davy on Wed, 4th Mar 2015 8:49 am
The solar and wind these financial guys are preaching is just another form of a BAU grid with no future. It is the wrong kind of AltE for what is ahead. That said any AltE is better than a new Nascar track, strip mall, and or highway to nowhere. Just remember the financial people and the BAUgreenies are preaching a shiny AltE future that is competitive but in reality is part of societies energy trap. They are selling exceptionalism of technology and complexity that will die when BAU dies.
The AltE we need is small scale, localized end user, low tech, and cheap. Society is in no position to build out a new grid. It can’t maintain what we have now so how are we going to build a new and complex alternative. This is just the human exceptionalism of false belief in substitution of fossil fuels through increased complexity of AltE. AltE is nothing more than a fossil fuel bridge. Again I hope we can build out as much of any kind of AltE we can but don’t be fooled by the agenda with selective use of facts, and a deceptive message of hopium.
gdubya on Wed, 4th Mar 2015 9:28 am
Davy, I don’t quite get it. Yes, we should have started 40 years ago, and solar is not replacing any current electricity plants. But there seems to be a fascinating mindset running here. We are unable to build ‘renewable’ energy but we are able to build coal plants. ‘Renewable’ electricity is dependant on fossil fuels, so we might as well just burn it in our F-650 Ram truck. The government will go broke building solar & wind, but it didn’t go broke building coal plants and gas stations. Solar on grid is bad but homeowners can now put up PV for the price of high end shingles. Solar cannot power industrial civilization therefore it is useless.
I’m as big a doomer as anyone but I will be very happy to have 100 W continuous to run my passivhaus when the system crashes.
sunweb on Wed, 4th Mar 2015 9:29 am
It is comforting to prefer the noise of delusional magical thinking and pretending that the system of perpetual growth can work forever. There is just too much tied up with it and any unraveling would be far too chaotic and unpredictable. Wrapping our heads around the eventualities of global warming; of overshoot; of the desecration of world wildlife; of the acidification of the oceans; of the poisoning of pollinators stymies. A world no longer powered by fossil fuels, no matter what incarnation, is almost inconceivable and for many terrifying.
It is like a person diagnosed with lung cancer saying he/she will just smoke these organic, non sprayed cigarettes for a little bit longer instead of facing the reality of the situation, quitting and having the operation.
Village of the Water Mills – Kurosawa
http://youtu.be/w1FIps–PGg
Northwest Resident on Wed, 4th Mar 2015 9:52 am
Texas has become one of the global leaders in wind power.
But hasn’t Texas always been a leader in “wind power”. Even before “wind power” became a commonly used phrase, people were always talking about all the hot air and billowing blusters coming out of Texas.
JuanP on Wed, 4th Mar 2015 9:55 am
Article on Oil & Gas Eurasia about Russia offering China majority investment options in Russian strategic fields. This was a no-no for Russia until now. Apparently, they’d be willing to cede financial control of specific fields to Chinese investors.
https://www.oilandgaseurasia.com/en/news/russia-prepared-give-china-50-stakes-oil-and-gas-fields
ghung on Wed, 4th Mar 2015 10:10 am
@sunweb: Once again you’re either unable or unwilling to respond to challenges and rebuttals to your position on renewables, so I ask, why should we take anything you post seriously?
BobInget on Wed, 4th Mar 2015 10:22 am
Note: Because of a continuing refinery strike
and INCREASED imports storage continues
to dominate oil prices.
Read EVERY WORD below but pay closer attention to the last paragraph…
See how close we are to 20 Million Barrels
P/D .. Consumption is up, not lower as indicated by 10 million barrels overage.
(whenever a BP refinery catches fire, (often)
little mention is made unless there were deaths).
CAPS MINE
Summary of Weekly Petroleum Data for the Week Ending February 27, 2015
U.S. crude oil refinery inputs averaged over 15.1 million barrels per day during the week
ending February 27, 2015, 130,000 barrels per day LESS than the previous week’s average.
Refineries operated at 86.6% of their operable capacity last week. Gasoline production
DECREASED last week, averaging over 9.5 million barrels per day. Distillate fuel production DECREASED last week, averaging over 4.6 million barrels per day.
U.S. crude oil imports averaged about 7.4 million barrels per day last week, UP BY 89,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged about 7.3 million barrels per day, 1.6% below the same four-week period last year. Total motor gasoline imports (including both finished gasoline and gasoline
blending components) last week averaged 640,000 barrels per day. Distillate fuel imports averaged 367,000 barrels per day last week.
U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum
Reserve) increased by 10.3 million barrels from the previous week. At 444.4 million
barrels, U.S. crude oil inventories are at the highest level for this time of year in at least
the last 80 years. Total motor gasoline inventories remained unchanged last week, and are well above the upper limit of the average range. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories DECREASED by 1.7 million barrels last week and are in the lower half of the average range for this time of year. Propane/propylene inventories FELL 4.2 million barrels last week but are well above the upper limit of the average range. Total commercial petroleum inventories INCREASED by 2.3 million barrels last week.
Total products supplied over the last four-week period averaged about 19.9 MILLION
barrels per day, up by 7.7% from the same period last year. Over the last four weeks,
motor gasoline product supplied averaged about 8.7 million barrels per day, UP by 4.0%
from the same period last year. Distillate fuel product supplied averaged over 4.2 million
barrels per day over the last four weeks, UP by 16.8% from the same period last year. Jet
fuel product supplied is UP 12.9% compared to the same four-week period last year.
================================================
HO up double digits is understandable ..
cold weather..
BUT! How about jet fuel up almost 13 %?
Jet fuel is an excellent economic indicator.
JuanP on Wed, 4th Mar 2015 10:28 am
My country, Uruguay is blessed with an abundance of renewable energy. On normal years, our hydroelectric plants produce more energy than we need, and the surplus is sold to Brazil and Argentina. We also export the electricity produced from our wind turbines and the backup gas and oil power plants, too, on most days. During extreme drought, we need to import some electricity.
This is a March1st article on the subject provided by GHung,
http://www.evwind.es/2015/03/01/uruguayan-brazilian-presidents-attend-opening-ceremony-of-wind-farm/50723
Uruguay now needs to install all forms possible of solar water and space heating and PVs. Our Achilles Heel is our exposure in cases of extreme drought, which would destroy the country. I think extreme droughts will become increasingly common in South America in the short term future as the Amazon jungle dies and we lose its water vapor, which is the source of much of South America’s rain. This drought tendency has been going on down there for around a decade now.
dave thompson on Wed, 4th Mar 2015 10:37 am
Renewable, solar, wind and perhaps hydro, on a small scale personal level,in home use are viable to those who might afford the purchase, installation and maintenance cost. However these industrial “alternatives” will never be brought to scale as a replacement for fossil carbon use. This is based on the laws of physics. Yes solar can be built out and used, in an industrial setting on the power grid. How much and for how long? If current trends are an indicator I can see why the pessimist would be the rule.
Davy on Wed, 4th Mar 2015 10:45 am
Gdub, here are some answers to your questions:
The US is not building coal plants anymore I know of. Maybe a few but very few. China probably is but that is another story of cancerous growth and mal-investment. China’s power generation has no future when China’s economy implodes from a dead export market when BAU crashes.
It is not the Governments place to build renewables out. It probably should be but the economy is not structured that way.
The Government is not building power plants Gdub!!!!!
You are right solar can’t power industrial civilization. We are broke as a society so we can’t build out a shiny new AltE grid to replace the fossil fuel grid we have. Let’s build out as much as we can anyway but it will amount to very little as has been the case up until now. Google the amount of AltE and the amount of FF power generation. Don’t count hydro because that is another story.
There is allot more to putting up solar than the cost of high end shingles.
BobInget on Wed, 4th Mar 2015 11:01 am
We in the West should be grateful Dave Thompson wasn’t President during ‘The Great Depression” when all the great dams were built providing cheap electricity, entire new industries for the next 75 years.
If anyone here has driven from California thru to Utah or Nevada, no one has to know how you broke that 75 MPH speed limit just because you were sick and tired tired of looking at sand.
OK Americans don’t get passports.
But…. Nevada alone gets enough sunshine
to solar power the entire time-zone … Plus the array could be under a few hundred acres
visible from the air.
(an AVERAGE grains or soy bean farm in the US is over 333 acres)
apneaman on Wed, 4th Mar 2015 11:13 am
Juan
Uruguay made some very smart moves on energy (good president). Unfortunately, hydro electric that relies on runoff from glacier and snow pack melt is vulnerable. We have the same problem here in BC. We produce 75% of our electricity from hydro electric, but almost all of our glaciers are melting due to climate change. We are going to be in trouble in the near future, so we just ignore it and go on shopping…….maybe it will go away on it’s own.
Glaciers, BC Hydro’s Melting ‘Batteries’
Scientists are trying to figure out how rising temps will change the alpine run-off that helps power the province.
http://thetyee.ca/News/2012/02/06/Glacier-Hydro/
Unprecedented melt of B.C. glaciers seeps into U.S. climate change concerns
http://www.vancouversun.com/technology/Unprecedented+melt+glaciers+seeps+into+climate+change/9851449/story.html
apneaman on Wed, 4th Mar 2015 11:35 am
American business/industry has been a government project from the get go.
Do a search on any industry and subsidies.
History of [insert industry] subsidies.
Coal: A Long History of Subsidies
http://www.taxpayer.net/library/article/coal-a-long-history-of-subsidies
Long History Of U.S. Energy Subsidies
Report shows centuries of government support for fossil fuels, much less for renewable energy
http://cen.acs.org/articles/89/i51/Long-History-US-Energy-Subsidies.html
rockman on Wed, 4th Mar 2015 11:39 am
NR – True: lots of “hot air” in Texas. But that’s rather common throughout the country. The big difference is that in Texas we do something rather useful with all that capacity…such as make a sh*t load of electricity. It always amazes me to see folks characterize wind power as not a viable alt in the US. If Texas were an independent country (which many here feel we really are) we would be tied with the third largest wind power generating country on the planet. And we’re still expanding rapidly.
One example: The Roscoe Wind Farm in Texas is one of the world’s largest capacity wind farms with 634 wind turbines and a total installed capacity of 781.5 MW. At the time of its completion, it was the largest wind farm in the world, surpassing the nearby 735.5 MW Horse Hollow Wind Energy Center.
Lots of other examples but I don’t want to abuse my personal massive “wind capability”. LOL.
ghung on Wed, 4th Mar 2015 11:39 am
Davy: “The US is not building coal plants anymore I know of.”
I wish it was so.
Clean (but Pricey) Coal in Mississippi:
“November 14, 2013 – Can coal-fueled power plants meet the Environmental Protection Agency’s proposed carbon dioxide emission limits? Next year, Southern Co. (SO) will fire up a coal plant in Mississippi, marking the industry’s biggest and most expensive bet that the answer is yes.
The Atlanta-based utility is hoping the Kemper County plant represents the future of coal. It’s designed to meet looming EPA standards with a new process that extracts pollutants, then sells them, rather than burning or dumping them. The future doesn’t come cheap: With $5 billion projected in total costs, the plant is 65 percent over budget and rising. In April, the Department of Energy estimated that a utility buying a plant with the new technology would pay double the price of a conventional plant. The Kemper County plant is even more costly, says Alan Beamon, director of Energy’s coal and electric power division. That makes it among the most expensive fossil fuel projects ever. Construction delays are preventing the planned May opening.”
From Wikipedia:
“The Kemper Project, also called the Kemper County energy facility, is an electrical generating station currently under construction in Kemper County, Mississippi. Mississippi Power, a subsidiary of Southern Company, began construction of the plant in 2010.[1] Once operational, the Kemper Project will be a first-of-its-kind electricity plant to employ gasification and carbon capture technologies at this scale.[2]
The station is scheduled to open in the first half of 2016, more than two years behind schedule, at a cost of $6.1 billion, making Kemper one of the most expensive power plants per kilowatt in the United States.”
Still cheaper than Southern’s new reactors in Georgia, (also over budget and schedule),, or is it? Renewables keep looking better compared to these ma$$ive projects.
dave thompson on Wed, 4th Mar 2015 11:43 am
At about 6% of electricity produced Hydro power has been built out to capacity in the US. Solar only works when the sun shines and wind power speaks for itself. BobInget please don’t shoot the messenger. BAU as we know it will not run at 75 miles per hour down the desert highway on alternative energy.
BobInget on Wed, 4th Mar 2015 11:51 am
Corn production (also maize production) plays a major role in the economy of the United States. The country is one of the worldwide corn leaders with 96,000,000 acres (39,000,000 ha) of land reserved for corn production. Corn growth is dominated by west/north central Iowa and east central Illinois. The US is ranked first in the world in corn production, and 20% of its annual yield is exported.[Wikipedia…
It takes between three and four gallons of diesel per acre to grow corn. For corn alone figure at minimum 300,000,000 gallons diesel. 70% corn is used for ethanol.
Stop ethanol production and we could feed ourselves.
Figure another 80 million acres of soybeans
(US and Canada combined acreage)
Biodiesel is often sold mixed with diesel.
If we tried to grow soybeans using only biodiesel for fuel result would be what’s called ‘deficit spending’. It can’t be done.
note:
When Venezuela begins servicing 70 billion in Chinese loans, (East/West Central American pipeline completions, roughly 2016/2017) US agriculture will be facing two
crisis. Climate changes and peak oil.
WE might cope with climate changes but Not both.
IMO: Libya and Nigeria will still be offline in 2016. If Israel loses sanity bombing Iran,
most if not all MidEast oil will be down for months or longer. In event of Nuclear war,
many, many decades.
Davy on Wed, 4th Mar 2015 11:51 am
I figured some new coal plants are being built G but is the net effect an increase? I am thinking more are being retired then are being built. Your info on the Kemper plant sounds like it will put carbon capture to bed for good. Funny how you don’t see clean coal commercials anymore. HA were they joking! or serious?????
Northwest Resident on Wed, 4th Mar 2015 11:59 am
rockman — That was a former Texan to current Texan attempt at lame Texas humor. A few cans of Coors beer might have made it perhaps even slightly funny.
But your points are very well taken. As these stranded oil assets become permanently stranded the further into the near future we travel, ANY renewable power source still running is going to be needed to transition us from our high energy fossil fuel burning civilization down to the low energy nothing-left-to-burn reality that we are inevitably headed toward. And that is NO JOKE.
I think the real-life Mad Max’s of the future will be digging fox holes and trenches around nuclear power plants, wind farms and hydroelectric power generators, because that is where all the “action” is going to be in an energy-deprived future.
Arthur75 on Wed, 4th Mar 2015 12:21 pm
this stranded assets rhetoric is such a joke, one of these “twisted” economists style thing that will fall flat.
The principle :
– government will put a too high prices on co2 for the remaining resources to be extracted
The reality :
– if anything governments will cut the existing extraction taxes and royalties for the remaining resources to be extracted.
(already happening)
apneaman on Wed, 4th Mar 2015 12:50 pm
Arthur
I bet you will eventually see environmental laws get scrapped too. It will be rationalized as a temporary measure for economical and/or security measures. We will only stop burning it by killing ourselves with the consequences. Evolution has programed us to do so.
Northwest Resident on Wed, 4th Mar 2015 1:00 pm
Arthur75 — A stranded asset is as much or more likely to be “stranded” by too-high-price for extraction/processing as it is by restrictive CO2 taxes. Eventually (like any day now) those stranded assets will be stranded solely on the basis of the extraction and/or processing cost being too high, or put another way, it takes more energy to get it out of the ground than the “asset” will provide in net energy gain.
Don’t you think?
Kenz300 on Wed, 4th Mar 2015 1:16 pm
Wind and solar investments are growing every year….. These are much more reliable with less price fluctuations than fossil fuels……
Climate Change is real….. we need to deal with it..
Pope Francis On Climate Change: Man Has ‘Slapped Nature In The Face’
Pope Francis’s edict on climate change will anger deniers and US churches | World news | The Guardian
http://www.theguardian.com/world/2014/dec/27/pope-francis-edict-climate-change-us-rightwing
Northwest Resident on Wed, 4th Mar 2015 1:28 pm
The Price of Oil Is About to Blow a Hole in Corporate Accounting
(Bloomberg) — There’s one place in the world where oil is still $95 a barrel.
On paper.
The U.S. Securities and Exchange Commission requires drillers to calculate the value of their oil reserves every year using average prices from the first trading days in each of the previous 12 months. Because oil didn’t start its freefall to about $45 till after the OPEC meeting in late November, companies in their latest regulatory filings used $95 a barrel to figure out how much oil they could profitably produce and what it’s worth. Of the 12 days that went into the fourth-quarter average, crude was above $90 a barrel on 10 of them.
So Continental Resources Inc., led by billionaire Harold Hamm, reported last month that the present value of its oil and gas operations increased 13 percent last year to $22.8 billion. For Devon Energy Corp., a pioneer of hydraulic fracturing, it jumped 31 percent to $27.9 billion.
This year tells a different story. The average price on the first trading days of January, February and March was $51.28 a barrel. That means a lot of pain — and writedowns — are in store when drillers’ first-quarter numbers are announced in April and May.
“It has postponed the reckoning,” said Julie Hilt Hannink, head of energy research at New York-based CFRA, an accounting adviser.
Using current prices instead of the SEC-prescribed $95 a barrel would erase $13.8 billion, or 61 percent, from the value of Continental’s oil and natural gas properties.
That’s called stranded assets!!
http://www.bloomberg.com/news/articles/2015-03-04/oil-at-95-a-barrel-discovered-in-sec-rules-on-reserves?cmpid=yhoo
BobInget on Wed, 4th Mar 2015 3:04 pm
Say a huge gas deposit is discovered where no pipeline connection exists.
Ultra deep-water maybe a good example.
In that event, at great expense, run pipelines
or power generation plant also at great expense and power transportation loss.
Who is to dictate (within reason) where a point-of-use alternative energy plant be located?
Arthur75 on Wed, 4th Mar 2015 3:09 pm
@Northwest resident.
Yes of course I agree that there are “real” stranded assets that will stay in the ground (and maybe more than we think), being non economically extactible (due to a too low EROEI even if it is counted in $).
But this article refers clearly to a kind of current rhetoric and movement( from the carbon tracker and the like) which pushes the idea that a high price on co2 imposed by governments will soon come, and render some “economically valid” resources “stranded”.
And by the way, even if I think this line of “communication” is messed up, I still think Deborah Rogers (author of current article) has done some great work on the financial analysis of shale gas.
Northwest Resident on Wed, 4th Mar 2015 3:53 pm
Arthur75 — Got it! Anyway, no worries. As they author of this article seems to imply, when we run out of oil, it won’t be a doomsday collapse scenario. Just the opposite! Because as we run out of economically accessible oil, “We appear to be entering a new era of wealth creation.”
ALL IS WELL… 🙂
shortonoil on Wed, 4th Mar 2015 6:10 pm
“We appear to be entering a new era of wealth creation.”
That comment is 100% correct. Instead of creating dollars, we will be creating nickles!
synapsid on Wed, 4th Mar 2015 6:28 pm
Juan P,
The idea of Russia allowing outside ownership was a no-no until last year. In the aftermath of Putin’s spring visit to China and signing of the gas agreements the idea was floated that China could be offered some resources.
OFT on Thu, 5th Mar 2015 3:15 am
I think Russia has allowed outside ownership – or joint ownership, at least – for some years. The challenge, however, is to avoid losing your investment when the state and its proxies decide it wants to reclaim that portion. Witness the invocation of environmental concerns in Shell’s Sakhalin investment, which saw Gazprom acquire a discounted stake. TNK-BP also had well publicised disputes.