FG moves to safeguard ‘oil dollars’ as countries move away from fossil energy

In a bid to rescue probable billions of dollars that would be trapped as countries turns away from fossil fuel, otherwise known as stranded assets, the federal government has reduced production royalties to between 5 and 15 per cent from 7.5 and 20 per cent respectively.

Also, Nigeria wants to almost triple its crude production just as a warming world seeks to accelerate a move away from fossil fuels.

In addition, the federal government wants to revamp moribund state-owned refineries to help wean Africa’s largest crude producer off refined fuel imports. The legislation also seeks to end the sort of legal and regulatory uncertainty that’s delayed investment and led to lawsuits and disputes over licenses. The hope is to avert the so-called stranded assets problem confronting oil, gas and coal companies.

What had seemed like an abstract debate about leaving oil, gas and coal in the ground to fight climate change has suddenly become real. Environmental activists have long fought for lower fossil-fuel production. Now, with the pandemic crippling economies and reducing energy use and prices, drillers and miners are coming to grips with projects that are no longer viable. Some companies are even abandoning investments, leaving deposits worth billions of dollars in the ground to languish as so-called “stranded assets..” While environmentalists applaud, fund managers, banks and regulators worry that project financing could sour and collateral become worthless.

While oil prices have recovered from the $20-per-barrel threshold they hit during the first wave of the pandemic (not to mention a brief foray as low as -$37.63), their current level around $40 is far below the average of $65 per barrel over the last couple of decades. “The oil price decline has led to a big rollback of shale drilling, and a drop in demand for carbon-based fuels could hurt prices further and make new projects uneconomical..”

Bloomberg cites Carbon Tracker’s estimate that about one-third of the $6.5 trillion in investment that fossils are planning through 2030 could be stranded if countries pursue the Paris Agreement target of keeping average global warming “well below” 2.0°C. By 2019, that prospect had a senior official at BP indicating the company could set aside longer-term, more complicated oil and gas fields in favour of projects it could develop more quickly.

Ultimately, “the pressure to curb emissions may prompt companies to leave the most carbon-intensive reserves untouched,” Bloomberg writes, citing Rystad Energy Vice President Parul Chopra. “Across the industry, projects most at risk include deep-water discoveries off Brazil, Angola, and in the Gulf of Mexico, as well as some Canadian oil sands assets.”

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