“Stranded Assets”A new challenge in energy investing

Jim JubakJubakPicks.com (free)

JubakAM.com (subscription)jubakspicks@gmail.com

Author of Juggling with Knives (order at Amazon.com)

My new book on volatility

Just what you need: a new challenge in energy investing

• Just when we’re trying to figure out when oil and gas prices will rebound

• Just when we’re trying to figure out when global oversupply will end

• Just when we’re trying to figure out the extent of any rebound—oil at $45? $65? $75? Will we ever see $100 again?

What’s a stranded asset?

• It’s all about global climate change• If the world is to keep the increase in

global temperature to the 2 degrees C agreed in Paris, then the world cannot burn all discovered deposits of carbon fuels

• Some percentage will have to stay in the ground—as stranded assets

Why take “stranded assets” seriously?

• Because the oil Industry—well some parts of the oil industry—does

• ExxonMobil (XOM) has begun publishing a carbon risk report looking at effect on value of reserves

• Because Wall Street is starting to• BlackRock November report “Price of

Climate Change”

But no consensus on how much will be stranded

• Royal Dutch Shell says NONE— assumes 6 degree increase in global temperature

• International Energy Agency says $300 billion with coal use peaking in 2015 and oil use in 2020—the new “Peak Oil”?

• Carbon Tracker and Grantham Institute on Climate Change at LSE say 60% to 80% of reserves unburnable--$20 trillion in assets

Big problem: Decision on how much to burn is political

• World could decide to do nothing—except talk—in which case Shell is right

• World could decide to do everything—in which case Carbon Tracker is right

• Or the world can decide to muddle through (BlackRock)—most likely scenario

Under a muddle through scenario (BlackRock)

• High degree of uncertainty is itself a market trend—cost of capital up for assets with most perceived risk

• Most perceived risk to high cost/high carbon assets

• Canadian tar sands, non-U.S. and non-authoritarian fracking, extreme high cost deep water projects (Petrobras?)

Time frame risk

• The longer it will take to get a project running, the more uncertainty and higher capital cost—Arctic E&P? (Statoil STO and Russia?)

• Projection of when the curves of time to develop and action on carbon might meet—2020 is date that seems to come up on lot on both timelines

Is a “stranded asset” scenario priced in?

• BlackRock (world’s largest asset manager) says NO

• Concluded in November 2015 No evidence of risk premium for stranded asset scenario to date

More on volatility in my book