Crystal balls and current affairs: the financial challenge of a changing climate to the oil and gas industry

Abstract

Despite debate, the fact remains that the climate is changing. When considering the factors that determine potential financial impacts and losses that upstream oil and gas business could suffer due to a changing climate, the issues may primarily appear to be related to weather and geography. On closer examination, the factors that determine the severity of the impacts and losses are largely determined by the design and interdependencies of the financial and economic mechanisms of risk management. There is an increasing consensus in the insurance industry that the challenge presented by climate change, along with the increasing power of climate models, will result in far-reaching changes to the presently accepted practices of risk transfer. This extended abstract describes the increased power of climate models and the improved understanding of the present levels of under-adaptation when viewed from the position of investors in large-scale and long-lived oil and gas assets in Australia. It then looks at risk transfer models and examines potential limitations that have been identified due to the focus on ad-hoc post-disaster recovery when compared to a cost-effective pre-disaster resilience approach. The extended abstract then discusses how changes in the risk transfer approach could affect the financial aspects of an oil and gas business, such as the cost of borrowing, self-insurance, capital allocation and planning.