US oil states face trillion-dollar bill over ARO delay
‘Very few’ oil and gas companies are doing enough to meet fossil fuel asset retirement obligations.
US states that produce oil and gas face a potential trillion-dollar bill if asset retirement obligations (AROs) do not receive greater attention in the immediate term, according to think tank Carbon Tracker.
Oil and gas companies have legal requirements to fulfil when retiring assets that are near the end of their lifespan – or they face financial penalties. But analysts from Carbon Tracker, which focuses on researching climate change, claim that many companies are not doing enough to meet these AROs.
Carbon Tracker argues that this risks creating significant financial costs for taxpayers in these US states.
“Very few companies are saving or making provisions to pay for this time and cost. Therefore, who is in place to pay for these costs when we come to the end of life of the assets?” said Henrik Jeppesen, head of investor outreach at Carbon Tracker, on a recent webinar.
“Many of the US oil producing states’ taxpayers are facing the potential of a trillion-dollar retirement bubble if oil and gas companies are not paying for these [asset retirement] costs.”
In particular, “premature asset retirement” from waning fossil fuel demand could accelerate the date at which these companies pay such costs.
Closure of oil and gas fields in the push to net zero would hit these companies’ revenues and provide less cash to meet the investment needed for AROs.
Many of the US oil producing states’ taxpayers are facing the potential of a trillion-dollar retirement bubble if oil and gas companies are not paying for these [asset retirement] costs.
An imperative to act now
This puts an emphasis on the immediate term, which is the “peak” of fossil fuel usage, and requires oil and gas companies to discuss their plans as early as possible with investors.
“The companies that adopt a managed approach to the peak, engage [with investors] so that companies are disclosing adequately their capital investment plans and so that investors are able to challenge them, hold them to account and crucially to understand the risks which they expose through the assets in which they invest,” said Mike Coffin, Carbon Tracker’s head of oil, gas and mining.
“Companies must plan for the peak to avoid wasting capital, and there's significant opportunity costs associated with that.“
