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Stranded Fossil Fuel Reserves and Firm Value

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  • 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.

Suggested Citation

  • Christina Atanasova & Eduardo S. Schwartz, 2019. "Stranded Fossil Fuel Reserves and Firm Value," NBER Working Papers 26497, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26497
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    2. Miriam Breitenstein & Carl-Philipp Anke & Duc Khuong Nguyen & Thomas Walther, 2022. "Stranded Asset Risk and Political Uncertainty: The Impact of the Coal Phase-Out on the German Coal Industry," The Energy Journal, , vol. 43(5), pages 27-50, September.
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    5. Felix Kapfhammer & Vegard H. Larsen & Leif Anders Thorsrud, 2020. "Climate Risk and Commodity Currencies," Working Papers No 10/2020, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
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    8. David Comerford & Alessandro Spiganti, 2023. "The Carbon Bubble: climate policy in a fire‐sale model of deleveraging," Scandinavian Journal of Economics, Wiley Blackwell, vol. 125(3), pages 655-687, July.
    9. Kühne, Kjell & Bartsch, Nils & Tate, Ryan Driskell & Higson, Julia & Habet, André, 2022. "“Carbon Bombs” - Mapping key fossil fuel projects," Energy Policy, Elsevier, vol. 166(C).
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q3 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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