"The Vulnerability of Oil Companies' Reserves and Market Valuation," with Saraly Andrade de Sá and Diego Cardoso
Abstract: Climate action will make the production of carbon resources less profitable, reducing economically exploitable oil reserves and their value, with implications for the climate, the oil industry, and its investors. In this paper, we measure the sensitivity of economic oil reserves and study the role of this sensitivity in market valuation of oil companies. Conventional financial analysis already estimates oil companies' exposure to oil price movements, among other factors. Yet we claim that its standard model focuses on the impact of oil prices at the intensive margin and ignores changes in economic reserves. First, we present a theoretical decomposition of the effects of an output price on a firm's value through the intensive and extensive margins, which we use to extend the conventional analysis of how oil price movements affect oil companies. We obtain a new testable model relating oil companies' expected stock returns to oil price changes that features the elasticity of economic oil reserves. We validate this model by exploiting financial data. The model improves the prediction of expected stock returns. Its estimation, however, does not identify the elasticity of economic reserves. Second, we measure the elasticity of economic reserves to the oil price by exploiting oil reserve data. We obtain time-varying elasticities of oil companies' economic reserves, a new metric that we call EER. Third, we use these EER estimates to explain oil companies' stock returns. Our results indicate an EER-premium, showing that the risk associated with more sensitive economic reserves is material to investors who demand compensation from oil companies for the possibility of stranded assets. Besides our methodological contribution, and our results' addition to the literature on transition risks, we provide new EER measures that have desirable statistical properties for the study of oil companies' financial vulnerability and behavior.
"What is the Effect of Oil Extraction Taxes?" with Diego Cardoso, Erik Katovich, and Pritam Saha
Abstract: Supply-side climate policies are receiving increasing attention from governments. For instance, the US is currently considering a major overhaul of rules governing oil extraction on federal lands – which have remained unchanged for nearly a century. We exploit lease-level variation introduced by a temporary royalty relief policy in 2020 to estimate the effects of changes in oil extraction taxes on drilling activity, oil and gas production, and royalty revenues. We assemble a month-lease panel covering drilling and production on all federal oil and gas leases in the contiguous United States between 2005-2022 that accounts for allocation agreements across leases. Using a difference-in-differences strategy to compare outcomes on leases approved for royalty relief with similar untreated leases, we find that royalty reductions lead to immediate increases in the number of producing wells (extensive margin), but also in production from already active wells (intensive margin). Evidence of an intensive-margin response differs from previous studies focused on conventional oil production, suggesting unconventional leases may be more reactive in the short run. Our estimates allow us to quantify the effects of proposed US oil extraction tax reforms on oil and gas production, public revenues, and carbon emissions.
"Labor Income in Free Access, Private Ownership, and Informality," with Kyungbo Han, Jérémy Laurent-Lucchetti, and Emmanuel Milet
"The Effect of Internal Carbon Pricing," with Emmanuel Milet and Giannis Papazoglou
"A Ceiling Limiting the Price of Russian Seaborne Exports of Crude Oil Insured by Western Companies," with Diego Cardoso and Steve Salant
Interview to the Swiss financial media Sphere Magazine on "Arthur Cecil Pigou" and the relevance of the polluter-pay principle for the resolution of the climate problem: Read it at https://lnkd.in/eb4WvtbV.
"Why Do Firms Issue Green Bonds?" with Shema Mitali and Jean-Charles Rochet