OIl & Gas industry in the US: feeling the heat?

In 2020, US oil & gas industry has started to feel the heat in their books. The climate change is no more reduced to an extra financial issue. It has a significant financial materiality. The sector is threatened by a double value slas : reserves write offs of reserves and litigations.

Reserve write offs are common to adapt the value of reserves to the evolutions of the oil price. In these days, there is deeper move. With climate change targets, the write offs are the beginning of the enacting of climate budget. Some assets will not be used as the expected demand for fossils fuels is going lower. In 2020, the US O&G companies start the same dynamic known among their European counterparts though in smaller size. The whole industry reported $ 85 bn write offs this year. This is much more than the write offs in the last three years combined. This has represented 7% of the market capitalisation of these companies (still far from the 20% of their European counterparts in 2020).

Litigations, and notably civil litigations, are more specific to US companies. For sure, litigations were also sparkling in Europe, notably the one about Shell strategy. But in Europe, it focuses on strategy and the investments needed to really implement it. In the US, the civil litigations come from local authorities asking to the oil & gas industry to contribute to their adaptation costs. A dozen of lawsuits have been filed in California and in the Midwest. The main argument of the files is not discussing the climate change itself, but the fact that US companies knew about it (as early as 1979) and covered it up. These lawsuits will take years but they will be a permanent thorn to the industry, providing regular incentives for regulations attempts. Many arguments are tested in court. The public nuisance argument enables to overcome the question of the damage to one individual and strives to prove the impact on the whole community and the way it affects individual rights of members of this community. Many complaints are based on the same fraud mechanism than the litigations in the tobacco industry: companies should be punished for having lied to their clients. They do not discuss how bad it is but the fact that the companies knew how bad it was and tried to hide it.

Companies and shareholders started to react. For instance, Exxon shareholders voted for 2 Board directors proposed by a small European NGO Follow This. It does not mean the shareholders changed their mindset about climate change but they want to have experts of climate change on Board as companies have included cyber experts in boards in recent years. The aim is to have people able to deal with this issue that may have a dramatic impact on oil & gas companies’ value.

No matter when these litigations will be settled. Meanwhile the US society will become more aware of the relationship between oil & gas activity and climate change and will become keener on regulations of the sector.