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Paul Spedding, co-head of energy sector research at HSBC in London, issued the first bank report on the carbon bubble in January. Oil & Carbon Revisited: Value at Risk from ‘Unburnable’ Reserves concludes the potential value at risk for oil and gas majors such as BP, Shell and Statoil equals 40-60% of market caps when you combine the potential negative impact of stranded assets and the related impact of downward pressure on prices for fossil fuels. It is “highly unlikely that the market is pricing in the risk of a loss of value from this issue,” Spedding writes. He advises energy sector investors to focus on low-cost companies, or companies with a gas bias, because “capital-intensive, high-cost projects, such as heavy oil and oil sands, are most at risk.”

Investors are increasingly concerned about longer-term systemic issues such as climate change and aging populations

In March, Standard & Poor’s Rating Services published What A Carbon-Constrained Future Could Mean For Oil Companies’ Creditworthiness, which outlined the risk facing three oil sands operations, Cenovus Energy Inc., Canadian Oil Sands Ltd. and Canadian Natural Resources Ltd. The study is one of a series looking at how to integrate environmental risk into corporate credit analysis. “As much as we would like to say that we are thought leaders, and we are in many respects, it has become apparent to us over the past few years that investors are increasingly concerned about longer-term systemic issues such as climate change and aging populations,” says co-author Michael Wilkins. The S & P study assumed – and it’s a big assumption – that public policy steps are taken to limit global warming to the two-degree target and then examined the possible impact on company cash flows and ability to exploit reserves “because limiting emissions translates into a peak demand situation.” The intent was to focus on companies most at risk, which led to the Canadian oil sands. “The bottom line on all this,” Wilkins says, is that if serious efforts are taken to meet the international target, lower oil demand could lead to dramatically lower prices. As a result, the Canadian companies studied, which have $13.6 billion in bonds outstanding (with more than 50% maturing after 2020), could face either negative outlook revisions or credit-rating downgrades over the next five years, which could lead to higher financing costs as well as dividend cuts and project cancellations. According to Wilkins, the impact on diversified majors such as BP and Shell would be more muted in the short term, but pressure on them would grow after 2017.