The oil and gas sector is in a precarious position, presented with risks from both extreme weather events and the policies implemented to curb these climate catastrophes. Most immediate for many firms, physical threats – such as (but not limited to) shifting permafrost, intensifying storms, flooding and wildfires – pose a threat to 40% of the world’s global oil and gas reserves. Expected to increase under future warming scenarios, these ongoing risks impact all stages of oil and gas operations and assets.

The impact, timing and magnitude of transition risks are more difficult to quantify – but business leaders cannot afford to ignore them. Research from Carbon Tracker estimates policy action on climate and the rise in alternative energy sources may lead to $1 trillion of oil and gas assets being stranded. Key transition risks include increasing carbon prices, technological disruptions and the rise of low-carbon alternatives, changes in public policy and consumer behavior, and associated market risk – as well as emerging legal risks. Analysis published in One Earth places climate reparations at $209bn per year, and suggests a framework for assigning climate-related economic damages to oil and gas firms, increasing legal risks for the sector as climate change litigation grows.

Oil and gas firms – as well as banks, investors and insurers working in the sector – must evaluate the potential for stranded assets under multiple scenarios. If decision-makers do not effectively confront their climate risk exposures now, they will be poorly positioned to manage threats in the long term.