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Stranded assets: do they have a future?

Posted on Posted in Chairman’s Blog

For a classic example of stranded assets, look no further than the ‘proved reserves’ i.e. oil in the ground, which feature in the annual reports of major oil companies.  Whilst adding apparent value to the corporate share price, their true worth is at significant risk from carbon liability. Why? Because the days of emitting carbon dioxide for free are decidedly numbered, and a carbon tax to incentivise the global trend towards lower-carbon living will inevitably reduce the value of these unused reserves, presently stranded underground.

This is bound to cause investor anxiety, because the Annual Report value of such geological assets – currently not subject to carbon auditing – may well reduce in the future. As a result, some commentators already think share prices of some multi-national oil companies are overvalued. Shareholders, from huge, multi-national pension funds, right down to individual personal investors, are justifiably nervous.

Clarity and transparency are needed to forestall such anxiety and head off shareholder flight. This is achievable through PAL’s forensic approach to carbon auditing and liability. Using our scientifically robust metrics for carbon auditing of corporations produces their ‘Carbon Liability to Earnings and Assets Ratio’ (CLEAR). CLEAR calculates, in percentage terms, the relative proportion of any company’s assets that can be vulnerable to the risk of carbon liability. This currently shows that two major oil companies both have a CLEAR of about 17% putative carbon tax specifically related to ‘proved reserves’ that are potentially future assets – at today’s prices. This percentage must rise.

Predict Ability Ltd (PAL) is the first company in the world to have determined a scientifically defendable price for carbon – based on the cost of loss and damage attributable to the climate change that fossil fuels trigger. This is the real price of carbon and the only price that matters.

We use this price to audit projects, corporations, transportation emissions, and all forms of electricity generation. It results in an accurate assessment of their carbon impact and is expressed in dollars per tonne, not mere tonnes of carbonOur carbon price for oil is currently a lowly 20 USD/tCO2 but our forward projection of the price of carbon is approximately exponential. This means that for oil companies, time is short, and the tide turning. The stranding of these geological assets is approaching faster than almost anyone imagined.

Using a scientifically defendable carbon price to value reserves will provide reassurance for shareholders and be evidence of a sustainable business model for their investment. Knowing the full cost implications for each barrel of oil equivalent – including its carbon price – should restore shareholder confidence. It also makes a powerfully ‘green’ vision statement, recognising the reality of climate change and mapping it on the company charts.

Doing this is so easy. Our intraday carbon price is dynamically incorporated on the PALcarbon Dashboard. This visually stunning graphical tool is a powerful means for driving energy strategy at a glance. Any corporation with its own bespoke version of the dashboard can show to customers, and the world at large, that they are serious about running their business in a clean and environmentally responsible way.

At the recent IHS CERAWeek in Houston, Texas, the CEO of Shell, Mr. Ben van Beurden, was calling for a carbon tax. This makes sense. Immediately there would be certainty about the taxation obligations for suppliers and end-users that would apply to all players on a level playing field. While a global carbon tax is a distant hope, regional taxes such as EU ETS, UK CPF and US SCC are in place by political diktat. For people already feeling overburdened with taxes, these lack a readily acceptable justification such as ‘the polluter pays’.

PAL’s real carbon price, on the other hand, would have wide public acceptance, as it is defendable scientifically and untainted by political ‘horse trading’. This authentic carbon price is a reality today, and while not yet adopted as a tax, can nevertheless be applied to make smart decisions about big-ticket projects as well as corporate accounting and energy strategy.

 

Bruce Menzies, Chairman, Predict Ability Ltd (PAL).

© Copyright Predict Ability Ltd 2017. All rights reserved.

Bruce Menzies

Author: Bruce Menzies

Bruce Menzies is Chairman and co-founder of PAL. He founded Global Digital Systems Ltd that won the Queen’s Award For Enterprise 2011. Bruce is co-author of six books on geotechnics and geology, one of which won the British Geotechnical Association Prize 2002. He holds doctorates from the Universities of London and Auckland, and is a Fellow of the Institution of Civil Engineers.

Stranded assets: do they have a future? was last modified: August 10th, 2017 by Bruce Menzies

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