Oil Companies' Reserve Sensitivity to the Oil Price (RSP)

Open online seminar with Saraly Andrade de Sá, Department of Food and Resource Economics.

Abstract:

Climate action will decrease the profitability of fossil fuel exploitation and reduce economically viable oil reserves. The reserve vulnerability to transition risk, however, varies across oil companies and depends on their reserve structure. This heterogeneity in the sensitivity of reserves to the oil price has implications for policymakers assessing the effectiveness of climate action and for companies and investors concerned about the energy transition and stranded assets. Our analysis comprises three parts. In the first part, we derive a theoretical and testable decomposition of the effect of the oil price on company value. In the second part, we use data from Rystad on economic reserves to estimate time-varying, company-level RSP metrics. Finally, we leverage financial data on monthly variations in oil and stock prices to examine the relevance of the RSP in the valuation of oil companies. Our estimates show that both the oil beta and the extensive margin terms are statistically significant, indicating that financial markets consider the changes in economic reserves. This implies that the sensitivity of these reserves is a relevant factor for company valuation. Furthermore, our findings demonstrate that market pricing is consistent both with the RSPs recovered from fundamental data and with model predictions relative to risk valuation.

How to participate

The seminar is open to all.
The seminar will take place online via Zoom: