Stranded assets: the problem of billions that no one wants to put on the balance sheet

An oil company's balance sheet shows proven reserves as an asset. What it does not show is the probability that a relevant portion of these reserves will never be extracted — because the cost of extraction exceeds the market price in a scenario of accelerated energy transition, because regulation makes them unviable before exhaustion, or because demand disappears before the company is able to monetize them. This is the problem with stranded assets: assets that appear on the balance sheet at their historical or current market value, but whose realizable value over a 10 to 20 year horizon is substantially lower. The difference between the two numbers is what no one wants to put on paper.

What defines a stranded asset

The concept of stranded assets is not new — economic literature has used it for decades to describe assets that lose value due to technological or market changes. What has changed is the scale and speed of the phenomenon in the context of the energy transition.

An asset becomes stranded when it loses value before the end of its expected useful life due to factors outside the operator's control. In the climate context, three mechanisms operate simultaneously: regulatory (legislation that prohibits or makes fossil fuels more expensive reduces the period of profitable operation), economic (the drop in the cost of renewables and the advance of electrification compresses demand and margins earlier than expected) and financial (institutional investors adopt disinvestment policies in fossils, increasing the cost of capital and reducing the present value of future flows).

When regulation signals restrictions, the financial market adjusts assumptions before the law comes into force — the asset loses market value even if it continues to operate.

Where is the money at risk

The most cited analysis, from the Carbon Tracker Initiative, estimates that between 1/3 and half of the fossil fuel reserves on the balance sheets of public companies would need to remain underground for warming to stay below 2°C. In a 1.5°C scenario, this proportion rises.

Reserves with high extraction costs—Canadian oil sands, Arctic oil, ultra-deepwater fields—are the most obvious candidates. But the problem is not limited to upstream. Long-distance gas pipelines built with an expected useful life of 40 to 50 years face the risk of underutilization if gas demand falls before the end of the amortization period. Coal plants in Europe and the US are already operating below capacity or facing early closure.

In Brazil, the pre-salt has competitive extraction costs on a global scale. But refining, petrochemical and derivatives distribution infrastructure faces different pressure: the demand horizon for gasoline and diesel is being compressed by the electrification of transport.

The gap between balance sheet and reality

The central accounting problem is that current standards — IFRS and US GAAP — require recognition of impairment when the recoverable value falls below the carrying value. But the calculation of recoverable value uses price and demand assumptions that companies define themselves — and there is a structural incentive for these assumptions to be optimistic.

When an oil company projects recoverable value at a long-term price of $70 to $80 per barrel without incorporating energy transition scenarios, it may respect the letter of the standard while producing a number that does not reflect real risk. Auditors have difficulty challenging long-term macroeconomic assumptions without a clear regulatory standard for what is “reasonable.”

The TCFD and ISSB S2 move in this direction by requiring disclosure of how assets would perform in different climate scenarios. But disclosure of scenarios and recognition of impairment are different things: the company can show that, in a 1.5°C scenario, certain assets would lose substantial value, and at the same time not record any impairment in the current balance sheet under the justification that the base scenario is different.

How investors are pricing risk

The financial market is not waiting for accounting to solve the problem. Private equity funds already incorporate climate risk analysis into valuation models, adjusting cash flow and discount rate assumptions to reflect exposure to stranded assets. In the debt market, financing for fossil fuel projects faces rising capital costs, with European banks explicitly refusing to fund new coal and unconventional oil projects. When the cost of capital rises, the present value of assets falls—regardless of any change in balance sheets.

Activist investors have used town halls to push for more transparent portfolio resilience analyses. The resolution approved by ExxonMobil shareholders in 2021, requiring impact analysis of 1.5°C scenarios, signaled that this pressure has no expiration date.

What to do before the market forces the answer

The most vulnerable strategic position is that of the company awaiting regulation or market pressure to recognize the problem. In this position, the company does not control the timing of recognition — and valuation adjustments made under external pressure tend to be more severe than adjustments made preventively with controlled communication.

The useful exercise is not to declare immediate impairment on assets that still have current value — it is to build an honest internal analysis of which portion of the portfolio is exposed to stranded asset risk in different horizons and transition scenarios. This map informs capital allocation decisions (where to invest in expansion versus where to maximize value extraction before the window closes), guides diversification and prepares communication with investors and creditors — who already do this analysis on their own and prefer companies that demonstrate risk awareness.