Carbon Bubble Special Report

Deflating the “Carbon Bubble”

The reality of oil and gas company valuation

The stock prices of oil and gas companies are not currently inflated and face limited risk of rapid devaluation as a result of demand destruction from the development of new climate policies in the near to medium term.

A divestment movement is arguing that investments in fossil fuel companies are risky because future carbon policies could curb hydrocarbon consumption keeping resources “stranded” below ground.

The movement argues that the stock prices of oil and gas companies are overvalued in the market today, creating a “carbon bubble” that will eventually burst. IHS Energy analysis finds that integrated oil and gas company investments are not currently inflated and oil and gas resources face limited near to medium term risk of demand destruction from the development of new climate policies and transition toward renewable energy sources.

The intrinsic value of publicly traded oil and gas companies is based primarily on the valuation of proved reserves—90% of which are expected to be monetized in the short to medium term. Valuations of fossil fuel reserves and extractive industry companies are overwhelmingly driven by the projected cash flow from projects and reserves that will be monetized over the next 10 to 15 years and not by the value of “probable” and “possible” resources that could be commercialized over a much longer timeline.

A broad definition of “proved reserves” inflates perception of near-term fossil fuel company carbon risk. Comparing current company valuations in equity markets to the carbon embedded in reserves beyond those expected to be economically produced in the next 10 to 15 years distorts carbon risk. Defining those assets as potentially “stranded” is misleading, since relatively minimal investment has been committed or made to nonproved reserves.

Bursting a so-called “bubble” would require abrupt change in the complex global energy system, which is highly unlikely due to technical, economic, and policy constraints. IHS does not anticipate climate policy or technological advances to develop at the pace or stringency associated with the carbon bubble thesis. Companies have begun to hedge their long-term carbon risk by investing in new technologies, pricing carbon into project costs, and diversifying portfolios geographically and by resource type.

This report was prepared for the IHS Energy Climate Strategy Dialogue (CSD).This service leverages data and intellectual resources across IHS Energy to analyze issues related to global climate change and environmental policy developments. It provides client workshops and written reports on markets, policy, and technology affecting company strategies and industry competition in an increasingly carbon-conscious world.

The financial analysis for this report was conducted by IHS Energy Company & Transaction Research Service. IHS Energy values oil and gas reserves using a discounted cash flow method. These valuations are validated by an active and open market for oil and gas assets as tracked by the research service.

Deflating the Carbon Bubble

To download IHS Special report, please complete the following information. Kindly disable pop-up blockers to download the report.

required fields