(Bloomberg) – A few points near the bottom corner of the world map in the South Atlantic, the Falkland Islands once stood at the forefront of a new era for the oil industry, as companies planet for resources saw.
Yet a decade after the discovery of as many as 1.7 billion tons of raw material in surrounding waters, the British overseas territory known for sheep breeding and tension with Argentina looks as far away as ever. Rather than the next limit, the project to extract energy risks is added to a list of what companies call “stranded assets”, which can cost them huge sums for motball.
While the coronavirus is destroying and crippling economies, European oil killers have made some uncomfortable appearances in recent months: oil and gas worth billions of dollars may never be pumped out of the ground.
As the crisis also accelerates a global shift to cleaner energy, fossil fuels are likely to be cheaper than expected in the coming decades, while emitting the carbon they contain will become more expensive. These two simple assumptions mean that ticking in some fields no longer makes economic sense. BP Plc said on August 4 that it would no longer conduct reconnaissance in new countries.
The oil industry was already struggling with the energy transition, many supply and signs of peak demand when Covid-19 began to spread. The pandemic is likely to bring that highlight forward and discourage exploration, according to Rystad Energy AS. The consultant estimates that about 10% of the world’s repaid oil resources – about 125 billion barrels – will become obsolete.
“There will be beach properties,” said Muqsit Ashraf, senior executive director responsible for the global energy industry at Accenture Plc. “Companies will have to accept the fact.”
The Sea Lion project in the Falklands has promised to be a world-class resource when Rockhopper Exploration Plc took the field in 2010. Hundreds of millions of dollars later and after a flare-up between Argentina and Britain over the legality of the project, the first phase has not yet brought oil to market.
Premier Oil Plc, Rockhopper’s partner, suspended its work on Sea Lion earlier this year, writing off $ 200 million in investments on July 15 because later phases were unlikely to happen.
Larger companies have also begun to vote on that realization for other projects. BP said in June it would evaluate its portfolio of discoveries and leave something undeveloped. Head of State Dominic Emery last year already questioned what kinds of sources “never see the light of day” might see. Complicated projects could be shelved in favor of fields that are faster to develop, such as U.S. shale, he said.
The pressure to reduce emissions could also encourage companies to dump the most carbon-intensive reserves, as France’s Total SE acknowledged last month when it took a $ 8 billion write-down on carbon-heavy assets.
Risk of Quicktake’Stranded Assets’ with climate action and $ 40 oil
The list of projects most at risk includes deepwater discoveries from Brazil, Angola and the Gulf of Mexico, said Parul Chopra, vice president for downstream research at Rystad. Canadian oil sands projects such as the expansion of the Sunrise development in Alberta are also in doubt, he said.
The Sunrise bond, a joint venture between BP and Husky Energy Inc., has a large supply of bitumen – potentially up to 3.7 billion barrels. Extraction, however, is complicated. Most oil sands projects are similar to mining activities. The bitumen is dug out of the ground and processed into heavy raw material, which must then be removed with lighter hydrocarbons before it can be refined into fuel.
Sunrise is more complex and expensive. The deposit is too deep to dig, so instead it is injected with steam to flow the bitumen into a well, where it can be pumped to the surface.
Sunrise was intended to be built in three phases, and eventually produced more than 200,000 tunnels of bitumen per day over 40 years. The first stage of 60,000 barrels a day began in 2015, just as crude prices were falling amid the first U.S. scale boom. Since March this year, production has shrunk to about 10,000 a day, net to Husky, amid falling prices and pipe capacity restrictions.
Neither Husky, who is running the project, nor BP have revealed a time frame for the next stages of development. They will require raw prices well above current levels, suggesting that expansion is not difficult, said Mike Coffin, an analyst at research group Carbon Tracker Initiative. (The think tank has received support from the charitable foundation of Michael Bloomberg, the majority owner of Bloomberg LP, the parent of Bloomberg News.)
In addition to their economic viability, carbon-intensive oil sands are also uncomfortable with BP’s ambition to become a “non-zero” company until 2050. No new oil sands projects fit into a world that meets the Paris climate agreement, according to Carbon Tracker.
Husky has said its long-term plans include the potential to expand Sunrise, but declined to estimate the timing as the required oil price. A BP spokesman said the company is overseeing oil sands projects.
In the Falklands, there is still hope that the outlook will improve. Rockhopper has said the challenges are not insurmountable, despite the distance from the islands and the hostility of Argentina, which fought a war with Britain in the 1980s and still maintains sovereignty over the territory.
It pointed to the involvement of other companies – Premier joined the project in 2012 and Navitas Petroleum LP is in talks to take a stake – to indicate that there is not much risk that Sea Lion will become a stranded asset.
But a final decision on the move will not be made until early next year, according to Prime Minister Tony Durrant. Previous deadlines for final investment decisions have come and gone. The company declined to comment on whether Sea Lion was at risk of turning into a ‘stranded asset’.
Sea Lion only needs oil prices in the low- to mid- $ 40s to break even, but probably requires at least $ 50 a barrel to secure debt, Rockhopper said. Benchmark Brent Raw is currently trading around $ 45, after falling by a third this year.
Finally, with oil in abundance, doubts about the strength of demand and long-term pressure to eliminate the most carbon-intensive production, it is a calculation that can be increasingly piled up against projects such as Sunrise and Sea Lion.
“Many properties have already been stripped from an oil price cycle perspective,” said Christyan Malek, head of EMEA oil and gas research at JPMorgan Chase & Co. “But if you then add the carbon curve, that takes out a bigger chunk.”
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