The world’s biggest oil companies are systematically over-valuing their assets based on excessively optimistic forecasts of future prices, according to a leading investor. UK asset manager Sarasin & Partners has asked the oil companies in which it invests, BP, Shell and Total, to reveal the full risk they face should demand for crude peak as the trend towards decarbonisation grows. Sarasin oversees almost £14bn of investments, including funds from many top charities.
The Paris Agreement to cut emissions and limit global warming has led many in the energy industry to argue that crude demand will peak within the next 20 years, with electric cars and renewables expected to challenge oil’s dominance. But the world’s top oil producers, which are increasingly positioning themselves for the so-called energy transition, have nevertheless continued to value their billions of dollars worth of oilfields and related assets based on long-term prices that appear more consistent with business as usual.
Natasha Landell-Mills, head of stewardship at Sarasin & Partners, said she was concerned oil companies were not doing enough to make investors aware of the risks. “What we’re looking for is a much better understanding of how resilient each of their businesses are to serious decarbonisation efforts,” Ms Landell-Mills said. “It should be standard practice for energy companies to reveal their sensitivity to lower oil prices.” Ms Landell-Mills examined disclosures by Royal Dutch Shell, BP, Total, Equinor, Eni, Repsol, Cairn Energy and Soco International, and found all used long-term oil price assumptions of $70-80 a barrel, rising by 2 percent a year.
At the same time all the big oil companies are lowering break-even costs for new projects, generally to below $50 a barrel, partly due to fears oil prices could weaken from increased competition. Consultants Wood Mackenzie said this year it expected global oil demand to peak by 2036. Asked by the FT whether it had plans to reveal the sensitivity of its earnings to lower prices, Shell said that a $10 a barrel swing in either direction of the price of Brent crude equated to a $3bn swing in earnings for its exploration and production division, or $6bn for the entire company.