Poor Reporting of Oil and Gas Decommissioning Costs Creates New Risks for Investors

Key oil and gas-producing countries including Canada are doing a poor job of reporting shutdown costs for fossil fuel infrastructure, making it hard to get a clear picture of the risks for investors, Carbon Tracker warns in a new study.

“Our report makes the case for improving transparency and comparability in how oil and gas companies in the UK, Canada, and Australia report information about obligations to decommission their fossil fuel infrastructure,” the UK-based think tank says in the report, Asset Retirement Obligations: What Lies Beneath?. “This includes information underlying the balance sheet liability, including estimated costs and timing.”

Those “gaps in reporting expose investors to financial and regulatory risks,” the report concludes.

Asset retirement or decommissioning obligations (AROs) are legal financial commitments that require companies to have a plan for dealing with assets at the end of their lifespan by restoring, dismantling, or otherwise decommissioning them when they are no longer productive. In oil and gas, that requirement applies to pipelines as well as other infrastructure.

In the United States, energy data strategist Steve Klimowski writes on LinkedIn, poor planning for asset retirement is leaving state governments with tens of billions of dollars in oil and gas cleanup costs.

The significant uncertainty around these obligations also has important financial implications for oil and gas companies, Carbon Tracker finds, including how the assets could be affected by the energy transition and other economic or regulatory factors, physical risks exacerbated by climate change, and demand replacement as other technologies usurp the assets’ usefulness. Those impacts could produce capital losses and affect a company’s ability to stay in business and meet its ARO obligations, the report says, making risk transparency and awareness important for investors and regulators alike.

Carbon Tracker looked at the thoroughness of ARO disclosure rules for 38 oil and gas companies headquartered in Australia, Canada, and the United Kingdom and scored them against 15 metrics that align with the International Financial Reporting Standards (IFRS). Even though the results were poor, Carbon Tracker noted that at least one company met each of the metrics, showing that they’re all reasonable to achieve.

Overall, Carbon Tracker found that UK companies reported 45% of the relevant information, compared to 42% in Canada and just 19% in Australia.. The highest-scoring company across all jurisdictions supplied only 73% of the information sought by the metrics.

The analysis revealed no apparent relationships between disclosure quality and the characteristics of individual companies, indicating that national regulatory practices “may be a key driver in the quality of financial statement disclosures—including for AROs.”

The report calls on financial market regulators to maximize transparency, make sure investors understand the uncertainties of asset retirement obligations, and “encourage companies to adopt consistent, comprehensive reporting practices.”