Experts about record $90: Shareholders may face ‘catastrophic levels of value destruction’ if oil price drops
Based on current surging prices oil giants should think twice about investing in new oil projects or they could risk wasting billions, a new report has warned.
The price of Brent crude oil has increased by nearly 40 dollars (£29) per barrel in the last year, and hit 90 dollars (£66) yesterday for the first time since 2014.
It means that new drilling projects that would not have made financial sense a year ago could now be economical.
However, a report from Carbon Tracker warned that oil companies should not make the mistake of assuming that this high price will stick around.
“Companies may see high prices as a huge neon sign pointing towards investment in more supply,” said Axel Dalman, who helped write the report.
“However, this could become a nightmare scenario if they go ahead with projects which deliver oil around the time that demand starts to decline.
“Shareholders could face catastrophic levels of value destruction as prices fall.”
Carbon Tracker
If they make long-term investment decisions under the belief that the price will remain high, oil firms could stand to lose 500 billion dollars (£370 billion) if prices fell to around 40 dollars on average after 2026.
This is a “conservative assumption”, Carbon Tracker said, as the world moves more and more towards non-fossil fuel alternatives.
Electric vehicles
New estimates show, for instance, that one in seven vehicles sold this year will be electric.
Co-author Mike Coffin said: “We know demand will weaken as the policy response to the climate crisis and deployment of new technologies accelerates.
“Failure to acknowledge the sea change risks wasting huge amounts of capital, delivering sub-par returns to investors, and locking-in emissions that take the world beyond Paris goals.”
Instead the report finds that companies should invest in shale oil projects, which can ramp up production quickly while energy prices are high.
That would present a better alternative, rather than betting that oil prices will stay high during the several years it will take to develop conventional projects.