Analysis of the Carbon Bubble Risk of Oil & Gas Companies in the Dutch Pension Market

Master thesis (2017)

Authors

Contributors

K. Blok (mentor)
L.M. Kamp (mentor)
Programme
Systems Engineering, Policy Analysis & Management (SEPAM) (TPM) (TU Delft)
Copyright: © 2017 Houben, G.
Climate Risk Oil and Gas companies Dutch Pension Market Stranded Assets Asset Allocation Asset Liability Management Carbon bubble
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Published Date

22-05-2017

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Programme

Systems Engineering, Policy Analysis & Management (SEPAM)

Abstract

To avoid uncontrollable climate change, the increase of global temperature should not exceed 2 degrees Celsius. Taking this into account, not all fossil fuel reserves can be exploited, which will affect the oil & gas companies and their assets. This not only poses a risk on companies operating in the fossil fuel sector, but also on the financial system which has close ties with this industry. Among the Dutch institutional investors, pension funds are most exposed to the ‘’carbon bubble’’ risk. This thesis aims to identify how the Dutch pension market should value this carbon bubble risk. Seventeen interviews were conducted with a pension fund, pension providers, and actors related to the pension market, comprising of 990 out of the 1300 billion euros in assets under management of the Dutch pension market. The average exposure to O&G companies in the pension portfolios is 7.45%, which is high. However, the Dutch pension market does not value carbon bubble burst probable, mainly due to an expected dominant rise in fossil fuel energy demand. Strategic Asset Allocation tools such as Asset Liability Management studies are not yet applied on O&G industry level. The scenario analysis using data of 11 O&G multinationals found ConocoPhillips, Exxon Mobil and Chevron are most at risk in a Carbon Bubble Burst scenario, assuming an abrupt energy transition. The results of this thesis can be used by other insitutional investors to obtain insight into carbon bubble risk valuation. Furthermore, it provides transparency for the Dutch citizens with a pension plan in how their pension providers value these risks. The scientific relevance of this thesis is the verification of the usage of ALM and SAA methods at O&G sector level on carbon bubble risk with practitioners in the Dutch pension market. Future research can be devoted towards the potential indirect impact of a carbon bubble burst on other sectors in the portfolio, or optimal strategies for pension providers to deflate a potential carbon bubble without facing the risk of missing additional returns.