This is part of a series exploring climate change regulation and how it affects companies globally.
There is no such thing as a stranded oil asset and this misunderstanding about oil and gas reserves is muddying the debate about the future of investment in hydrocarbons in a world that is worried about climate change.
Oil companies have known about "stranded assets" ever since the first wells were drilled more than a century ago. Stranded gas is everywhere: deep offshore, in the Arctic, in remote areas of Africa and Latin America. The portfolios of the oil majors are full of huge gasfields that are stranded - the resource cannot be monetized due to lack of technology, access to markets or simply because the cost of recovery is too high and therefore further investment is pointless.
Stranded hydrocarbon assets have no real value, just "hope" value for speculators. They don't qualify as proven reserves and the cost of discovery is written off. However, some climate change campaigners have latched on to this notion in order to suggest that a financial catastrophe is looming. According to the "stranded assets" theory, a majority of the oil and gas reserves held by companies will never be consumed because of the need to mitigate climate change.
Even such an august Canadian banker as Mark Carney has been swayed by this notion. In a speech to Lloyds of London, the insurance market, the Governor of the Bank of England referred to the potential transition risk for investors if the majority of the world's oil and gas were deemed untouchable.
The prognosticators of doom are making a fundamental error: oil and gas only has value and only qualifies as an asset or a "reserve" if it can be economically extracted. You may know there are shale deposits beneath your home but they remain worthless until someone takes steps to prove that the geology beneath your feet can generate barrels of cash.
Energy is a market place and the value of energy commodities fluctuates, sometimes with high volatility. Valuable energy assets can become stranded and lose their value. In the beginning of the 20th century, millions of horses were transformed from useful beasts of burden into less valuable glue by the automobiles that rolled off Henry Ford's assembly lines.
Technology is currently having a similar impact on the coal industry. According to research by Bloomberg, more than half of the assets in the worldwide coal industry are held by companies that are undergoing insolvency proceedings or are failing to earn enough to pay their interest bills.
You might think this proved the climate change bell was tolling for oil and gas but it is not even tolling for coal. What drove Peabody Coal into bankruptcy was the collapse in the coal price which in turn was a direct consequence of the extraordinary fall in the price of natural gas. As with horses and motor cars, so with coal miners and gas drillers: the disruptive effect of natural gas fracking has made that fuel more economically attractive.
For horses, the technology disruption was enough to transform a key part of the energy economy that provided transport for millions into a plaything and pastime for the wealthy few. However, in the case of coal, we have not reached that juncture. Coal is not yet permanently stranded because it remains a popular fuel in Asia and its survival will depend on markets, commodity pricing and technology, not policy.
In order for policy to truly condemn coal or oil or gas, competing energy sources must be available in such quantity and at such low cost, that the market determines the switch out of carbon. Unfortunately, while the cost of solar panels has fallen dramatically, the technology of renewable energy has not reached the point where it can fully or even mostly replace hydrocarbons. We need more efficient electricity storage mechanisms and we need cheaper nuclear power technology.
Even were it possible to do so (and it probably is not) no sane government would seek to ban a valuable fuel without a viable and affordable alternative. Instead, we are more likely to see a gradual transformation of the hydrocarbon industry as it adjusts to market influences - taxes on carbon-rich fuels and technological change. The pressures on the industry, from taxation and regulation as well as volatile pricing will probably renew the impetus for mergers and consolidation. Like the tobacco companies, oil and gas enterprises will get bigger and leaner, more like efficient processors, distributors and retailers, than speculative explorers.
That would be an orderly transition to a new energy economy; the alternative is the disorder and chaos that underlies the wishful thinking of the stranded asset theorists. If we treat oil and gas as stranded today, investment will dwindle. The market knows what the consequences of an investment hiatus in oil and gas might look like and the omens are not good.
Wood Mackenzie, the energy consultancy, reckons that $1 trillion of planned capital spending has been removed from the oil industry's budgets up to 2020, due to the weak price of crude oil. The shrinking investment could reduce output by 4 per cent. Less investment always means fewer barrels and oil price forecasters will take the cue and we will soon see the impact on the futures market.
There is nothing new in oil gluts leading to investment famines and subsequent oil price surges. However, a politically-motivated investment famine would be another matter. It could have a catastrophic impact on energy investment and lead to a new energy crisis, one that would make hundred dollar oil look like a summer holiday.
Carl Mortished is a Canadian financial journalist based in London.