Working Paper: NBER ID: w26497
Authors: Christina Atanasova; Eduardo S. Schwartz
Abstract: Do capital markets reflect the possibility that fossil fuel reserves may become “stranded assets” in the transition to a low carbon economy? We examine the relation between oil firms’ value and their proved reserves. Using a sample of 600 North American oil firms for the period 1999 to 2018, we document that while reserves are an important component of oil firm value, the growth of these reserves has a negative effect on firm value. This negative effect on value is stronger for oil producers with higher extraction costs. When we decompose total reserves into developed and undeveloped reserves, we show that the negative effect of reserves growth on value is due to firms growing their undeveloped oil reserves. Unlike developed, undeveloped reserves require major capital expenditures and longer time before they can be extracted. We also document that the negative effect is stronger for undeveloped oil reserves located in countries with strict climate policies. Our evidence is consistent with markets penalizing future investment in undeveloped reserves growth due to climate policy risk. High level of institutional ownership, stock market liquidity and analyst coverage do not change the negative effect of undeveloped reserves growth on firm value.
Keywords: fossil fuel reserves; firm value; stranded assets; climate policy; oil firms
JEL Codes: G12; Q3; Q5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| growth of undeveloped reserves (Q32) | Tobin's Q (G19) |
| total proved reserves (L71) | Tobin's Q (G19) |
| growth of undeveloped reserves (Q32) | firm value (G32) |
| extraction costs (L72) | growth of undeveloped reserves (Q32) |
| 2015 Paris Agreement (F53) | firm value (G32) |
| institutional ownership (G32) | firm value (G32) |
| analyst coverage (G24) | firm value (G32) |