Asset Management Planning “Stranded Assets” as Govts Aim for Net-Zero

Ever wonder what will become of the fossil fuel infrastructure as the world slowly transitions to renewable energy?

Hydrocarbons – crude oil, natural gas, and oil, represent the most significant energy source, and most industries are powered by it. But the use of hydrocarbons has negatively impacted the world’s climate, and carbon emissions from its use have led to climate change.

The increasing impacts of climate change have pushed countries to reduce their emissions. And as governments pursue net-zero emissions by 2050, oil and gas infrastructure investments – pipelines, processes, storage sites, equipment, etc. will become stranded assets and no longer generate economic returns due to regulatory and market shifts.

According to the Hellenic Shipping News article “Energy Transition Insights – How to ensure hydrocarbon infrastructure still has value,” investors and asset owners anticipating these imminent changes should ask themselves the following questions:

• Which of my current or future assets will become stranded?
• How long will this happen, and what can I do to avoid it?

The article notes that due to decreasing fossil fuel demands and investments, up to $1 trillion assets from the top 40 oil companies worldwide are at risk.

At the height of the pandemic, oil and gas company’s oil and gas company’s got a taste of the market volatility when demands suddenly plummeted, and operations were disrupted, affecting supplies.

The article says that national net-zero commitments are growing, accounting for 68% of global GDP. Investors are becoming increasingly aware of environmental regulations affecting investments in existing and future oil and gas infrastructure despite their current economic viability.

GreenBiz’s article “The growing concern over stranded assets” says that the concept that these trillion dollars’ worth of assets would become “stranded assets” seemed largely hypothetical or a far-off concern for years. But now, with changes in market, regulatory, society, and policy, it is just a matter of time.

The article mentions that stranded assets have suffered from unanticipated or premature write-downs, devaluations, or conversion to liabilities. In other words, these assets that once had value or produced income no longer do due to some external change, in this case, climate change.

We go back to the crucial question: how can oil and gas companies prevent their infrastructure from becoming stranded assets?

The Hellenic News article suggests that oil and gas companies can take the following steps to adapt, repurpose, and retrofit their assets to become useful for low-emissions processes and operations, making investing in existing and future assets more “palatable.”

• As the industries accelerate the reduction of their scope 1 and 2 emissions to reach net-zero operations, oil and gas companies can improve their assets efficiencies, electrify processes, and reduce methane and other leakages. However, asset owners should also be aware these changes can only work up to a certain extent.
  
  
• Examples of these asset transitions include a proposal by an industry group, Gas for Climate in Europe, to use existing natural gas pipelines for a hydrogen network. Existing pipelines and carbon wells could also be suited for carbon and storage (CCS) technologies.  Abandoned wells and boreholes can be repurposed for geothermal energy.
  
  
• “Reusing existing infrastructure in this way is smart not just from an investment perspective but also because it allows asset owners to take advantage of existing environmental permits, land rights, and so on. But the extent to which this model can be replicated elsewhere will depend not only on how widespread hydrogen and CCS become in future but also on a range of other technical and commercial factors.”
  
  
• But even as the idea of reuse, retrofitting, and repurposing assets sounds convincing, there are hurdles to achieving them. Firsts, you can’t expect infrastructure designed for oil and gas infrastructure to work as well with carbon or hydrogen; second, there is the feasibility and high cost of adapting assets, although recent reports show that oil and gas could enjoy many opportunities from low-cost CCS and hydrogen.
  
  
• The net-zero pathways strongly feature CCS and hydrogen, indicating infrastructure adaptation and development could go in that direction. But with many uncertainties going on regarding the pace and trajectory of low-carbon infrastructure development, it would be prudent for both asset owners and investors alike to ask themselves the following questions: How relevant are these assets before oil and gas prices fall or how long until they will be decommissioned? How readily can it be adapted for low-carbon applications? And lastly, what circumstance will favor the conversion of these assets?

The global push to speed up the transition to renewables is making investments in exclusive hydrocarbon assets uncertain. Owners and investors should start preparing and planning how their existing assets would fit in a low-carbon future.

Infrastructure asset management techniques of a broad analysis of service provision and recycling, reuse, repurposing of assets to deliver services can undoubtedly be applied to current fossil fuel infrastructure.