Inadequate Disclosure of Fossil Fuel Decommissioning Costs Exposes Investors to Hidden Financial Risks

Major oil and gas-producing countries including Canada, the United Kingdom, and Australia are systematically failing to provide transparent reporting on the costs to shut down and decommission fossil fuel infrastructure, creating substantial financial and regulatory risks for investors that cannot properly assess long-term liabilities, according to a comprehensive new study by Carbon Tracker Initiative.

The UK-based financial think tank’s report, “Asset Retirement Obligations: What Lies Beneath?”, reveals significant variation in the quality and completeness of decommissioning cost disclosures despite companies in all three jurisdictions ostensibly following the same International Financial Reporting Standards (IFRS). The gaps in reporting prevent investors from understanding the scale, timing, and uncertainties embedded in companies’ cleanup obligations—liabilities that could total trillions of dollars globally and materialize much sooner than anticipated as the energy transition accelerates.

“Our report makes the case for improving transparency and comparability in how oil and gas companies in the UK, Canada, and Australia report information about obligations to decommission their fossil fuel infrastructure,” Carbon Tracker states. “This includes information underlying the balance sheet liability, including estimated costs and timing.”

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Massive Global Decommissioning Liability

The total global cost of decommissioning existing oil and gas infrastructure is estimated to be $4 trillion, representing one of the largest unfunded liabilities in the global economy. As the energy transition gathers momentum and fossil fuel infrastructure becomes economically obsolete earlier than originally planned, these cleanup costs are being accelerated while the production revenues companies expected to use for decommissioning disappear.

Asset retirement or decommissioning obligations (AROs) are legal financial commitments requiring companies to have plans for dealing with assets at the end of their productive lifespan by restoring, dismantling, or otherwise decommissioning them. In the oil and gas sector, these obligations apply not only to individual wells but also to pipelines, refineries, processing facilities, and all associated infrastructure.

The urgency of addressing ARO transparency intensifies as climate policies, technological disruption, and market dynamics threaten to strand fossil fuel assets before their expected economic lives conclude. When assets become stranded due to premature obsolescence, retirement costs accelerate while the cash flows that were supposed to fund decommissioning evaporate, creating potential funding shortfalls that shift liability to governments and taxpayers.

Systemic Reporting Failures Across Jurisdictions

Carbon Tracker assessed 38 oil and gas companies‘ financial statements using 15 disclosure metrics aligned with International Financial Reporting Standards. Even though each metric was demonstrated as achievable—with at least one company providing the relevant information—overall disclosure proved woefully inadequate, leaving investors with incomplete and non-comparable information.

The analysis revealed that UK companies reported only 45% of relevant information required to assess the full extent of asset retirement obligation liabilities. Canadian companies disclosed an average of 42% of necessary information, while Australian companies provided just 19%—less than one-fifth of what investors need to properly evaluate decommissioning risks.

The highest-scoring company across all three jurisdictions supplied only 73% of the information sought by the metrics, revealing that even the best performers leave investors with significant knowledge gaps about long-term financial obligations. This variation persists despite all companies theoretically operating under the same international accounting standards framework.

Critically, the analysis revealed no apparent correlation between disclosure quality and individual company characteristics such as size, profitability, or asset portfolio composition. This finding points to national regulatory practices as a key driver in financial statement disclosure quality, suggesting that more observable regulatory activity in the UK and Canada compared with Australia may explain jurisdictional differences in reporting standards.

Financial Implications and Risk Factors

The significant uncertainty surrounding decommissioning obligations carries important financial implications for oil and gas companies that extend far beyond simple accounting entries. These liabilities interact with multiple risk factors that could fundamentally alter companies’ financial positions and viability.

First, the energy transition itself affects how and when assets must be retired. If decarbonization policies, renewable energy competition, or demand destruction render fossil fuel infrastructure obsolete earlier than expected, decommissioning costs accelerate while the productive life generating revenues to fund those costs contracts. This temporal compression creates funding gaps that companies may struggle to bridge.

Second, physical risks exacerbated by climate change can damage infrastructure or necessitate earlier retirement. Coastal facilities threatened by sea level rise, installations in areas experiencing increased extreme weather, and assets affected by temperature extremes or changing precipitation patterns may require premature decommissioning with associated cost implications.

Third, demand replacement as other technologies usurp fossil fuels’ usefulness in transportation, heating, electricity generation, and industrial processes erodes the economic foundation supporting continued operation. Once assets no longer generate sufficient cash flows to justify operation, retirement obligations crystallize while funding sources disappear.

These combined impacts could produce capital losses and fundamentally affect companies’ ability to remain in business and meet their ARO obligations. Without transparency around assumptions, sensitivities, and payment schedules, investors cannot assess how vulnerable specific companies are to these risk scenarios or compare exposure levels across different entities and jurisdictions.

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United States Orphan Well Crisis as Cautionary Tale

The United States provides a sobering illustration of what inadequate ARO planning and regulatory oversight produce. Energy data strategist Steve Klimowski notes on LinkedIn that poor planning for asset retirement is leaving state governments with tens of billions of dollars in oil and gas cleanup costs as wells become orphaned when operators default on decommissioning obligations.

According to the Government Accountability Office, the 2.1 million unplugged abandoned wells in the United States could cost as much as $300 billion to properly decommission. Carbon Tracker’s own analysis estimated that plugging just 2.6 million documented onshore wells in the US alone would cost $280 billion—excluding costs for an additional estimated 1.2 million undocumented onshore wells.

Available bonding data suggests that states have secured less than 1% of required funds in surety bonds, leaving oil and gas-producing states exposed to hundreds of billions of dollars in orphan well liability risk. A ProPublica investigation found that state regulators in the 12 largest oil and gas states held just $2.7 billion in total bonds for unplugged wells—approximately 1% of estimated cleanup costs.

Individual states face crushing financial burdens. New Mexico confronts between $700 million to $1.6 billion in future plugging costs for identified wells, with an additional 3,000 marginal wells at high risk of abandonment. Current cleanup of 700 wells will require $208 million and nearly a decade to complete.

Research analyzing nearly 19,500 wells found median decommissioning costs of approximately $20,000 for plugging only and $76,000 for plugging with surface reclamation. However, costs vary dramatically based on well depth, age, location, and complexity, with some cases exceeding $1 million per well.

Refining Sector’s Hidden Liabilities

The decommissioning crisis extends beyond upstream well operations into downstream refining infrastructure. Carbon Tracker’s analysis of US refining companies revealed that these firms are not accounting for the enormous demand substitution challenge posed by transportation electrification and declining fossil fuel consumption.

The financial think tank’s conservative first-order estimate for the six largest listed refining companies in the US to decommission their refining assets totals $34 billion—versus less than $1 billion recorded on balance sheets today. For each of the six companies, estimated total gross costs exceed 20% of total equity, with two companies facing ARO costs amounting to over half their total equity values.

These massive off-balance-sheet liabilities represent existential threats as the energy transition renders refining capacity obsolete. Yet current accounting practices allow these multi-billion-dollar obligations to remain largely invisible to investors conducting financial analysis.

Regulatory Response Requirements

Barbara Davidson, Head of Capital Markets Transparency at Carbon Tracker, emphasized the severity of disclosure failures: “Our analysis shows that oil and gas companies are routinely failing to provide sufficient information needed by investors to assess the scale, timing and uncertainty of companies’ decommissioning obligations. Investors cannot properly evaluate the impact of future ARO payments on a company’s liquidity, compare companies across jurisdictions or understand the risks embedded in these long-term liabilities without transparent assumptions, payment schedules and sensitivities.”

The report calls on financial market regulators to implement three critical reforms:

First, prioritize transparency of decommissioning liabilities in supervision and oversight activities. Regulators must signal that ARO disclosure quality matters and will face scrutiny, creating incentives for companies to invest in comprehensive reporting systems.

Second, ensure investors can understand the scale, timing, and uncertainty of obligations through standardized, comparable disclosure requirements that eliminate the current fragmentation allowing companies to obscure material liabilities.

Third, encourage companies to adopt consistent, comprehensive reporting practices aligned with international best practices, moving beyond minimum compliance to provide decision-useful information supporting capital allocation and risk assessment.

Rob Schuwerk, Head of Research at Redwater Insights and part of the Polluter Pays Project, noted: “Differences in ARO reporting across the UK, Canada and Australia, despite being governed by the same accounting standards, demonstrates that regulatory activity and oversight matter tremendously for disclosure quality.”

Investment and Policy Implications

The ARO transparency crisis carries profound implications for capital markets and climate policy. Investors allocating capital to oil and gas companies without visibility into multi-billion-dollar decommissioning liabilities make decisions based on incomplete financial pictures that may dramatically overstate companies’ true economic value and understate risks.

Credit rating agencies’ treatment of AROs compounds the problem. S&P considers tax-adjusted asset retirement obligations in credit rating analysis but does not consider possibilities that well plugging costs may materialize sooner or cost more than companies estimate. Moody’s and Fitch do not consider AROs at all in their ratings, meaning that bonds and debt securities trade without proper reflection of decommissioning liability risks.

For policymakers, the orphan well crisis demonstrates consequences of inadequate bonding requirements and regulatory oversight. Failing to require full bonding creates incentives for operators to spend on drilling new wells or rewarding investors while pushing closure costs into the future, eventually leaving governments to absorb liabilities when companies default.

The Biden administration’s allocation of $4.7 billion from the Bipartisan Infrastructure Law for orphan well cleanup represents taxpayers funding obligations that oil and gas companies should have financed through proper reserves and bonding. While this program will address some legacy liabilities and create employment, it also constitutes a massive bailout of an industry that externalized cleanup costs for generations.

Path Forward: Transparency as Risk Management

Achieving meaningful improvement in ARO disclosure requires coordinated action across multiple dimensions. Accounting standard-setters must clarify and strengthen requirements for decommissioning liability reporting, eliminating ambiguities that allow inconsistent practices. Regulators must actively supervise compliance with disclosure standards, imposing consequences for inadequate reporting that currently faces no material sanctions.

Investors and financial analysts should demand comprehensive ARO information in engagement with companies and credit rating agencies, making disclosure quality a factor in capital allocation decisions. Industry associations and companies themselves should recognize that opacity around multi-trillion-dollar liabilities undermines market confidence and potentially increases capital costs as investors apply risk premiums to compensate for uncertainty.

The energy transition makes transparent decommissioning cost reporting not merely a disclosure improvement but an urgent financial stability issue. As fossil fuel assets face accelerated retirement, the resources needed for cleanup will materialize sooner while revenue sources evaporate faster. This temporal compression transforms decommissioning from distant abstractions into immediate financial obligations that could overwhelm under-reserved companies.

Carbon Tracker’s finding that better disclosure is achievable—demonstrated by at least one company meeting each metric—proves that comprehensive ARO reporting is realistic rather than aspirational. The question is whether regulators, investors, and policymakers will act with sufficient urgency to mandate transparency before stranded liabilities trigger financial crises that burden taxpayers with cleanup costs the industry should bear.

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By: Montel Kamau

Serrari Financial Analyst

12th January, 2026