Investment by Oil and Gas Firms in High-and Low-Carbon Energy: The Effect of Energy-Related Uncertainty and Climate Policy 2024

Abstract

To meet climate goals, low-carbon (LC) energy investment needs to grow while oil & gas (O&G) investment falls. Using asset-level data for O&G (1990-2022) and LC energy (2010-2022), we examine how energy-related uncertainty and climate policy impact the final investment decisions (FIDs) of O&G firms. We deploy the OECD Environmental Policy Stringency Index to measure country-level climate policy and the Energy-Related Uncertainty Index (Dang et al., 2023) to measure country-level energy uncertainty. For a global sample of public O&G firms, we use a fixed effects Poisson model to show that higher uncertainty is associated with a fall in FIDs for both LC and O&G assets. For climate policy, we find that stronger market-based policies such as carbon prices reduce O&G investment, while stronger technology support policies such as feed-in tariffs increase LC investment. We then use survival analysis to model the duration to investment of O&G assets, expanding the scope of our analysis to include privately and nationally owned assets. These results also indicate that increased uncertainty and stronger climate policy reduce the likelihood of O&G FIDs. These findings are of relevance to policymakers looking to incentivise oil & gas firms to transition.

Keywords: energy transition, uncertainty, climate policy, oil & gas, low-carbon energy, fossil fuels