Banking Law and Oil & Gas Stranded Asset Risk in Spain

1. Introduction

Oil and gas stranded asset risk refers to the possibility that investments in oil and gas exploration, production, refining, pipelines, storage facilities or related infrastructure lose substantial economic value before the end of their expected useful life because of regulatory changes, decarbonisation, technological change, falling demand, carbon pricing, litigation, or changing market conditions.

For Spanish banking law, this is important because an oil-and-gas asset may become “stranded” without physically disappearing. A producing field, refinery or gas infrastructure may remain operational but become less profitable, difficult to refinance, difficult to sell, or unable to generate the cash flows originally assumed by a lender.

Spanish law now expressly connects climate-transition risk with financial risk. Article 32 of Law 7/2021 on Climate Change and Energy Transition requires credit institutions supervised by the Banco de España/ECB to report the financial impact of climate risks, including transition risks, and to publish decarbonisation objectives for their loan and investment portfolios. Article 33 requires the Banco de España, CNMV and insurance supervisor to assess climate-related risks to the Spanish financial system.

2. Meaning of Stranded Asset Risk

An asset becomes stranded when its expected economic value falls materially before the end of its anticipated economic life.

For an oil/gas borrower, the chain can be:

Climate policy → lower fossil-fuel demand → lower asset utilisation → lower revenue → lower asset value → weaker borrower → higher probability of default → bank losses.

For example, suppose a bank finances an offshore gas project for 20 years. If regulatory restrictions, carbon costs or declining demand make the project uneconomic after 10 years, the bank may face:

• deterioration in the borrower's cash flow;
• reduction in collateral value;
• impairment of loans;
• refinancing difficulties;
• increased probability of default;
• higher expected credit losses;
• concentration risk;
• market-value losses on bonds/equity;
• liquidity problems; and
• reputational and litigation risks.

The ECB expressly identifies asset stranding as capable of causing abrupt repricing and reducing the value of banks' assets and liquidity buffers.

3. Spanish Legal Framework

A. Law 7/2021: Climate Change and Energy Transition

The principal Spanish statute is Law 7/2021, of 20 May, on Climate Change and Energy Transition.

Article 9 — Hydrocarbons

Article 9 establishes that, following its entry into force, Spain will not grant new authorisations for exploration, new hydrocarbon research permits or new exploitation concessions within the national territory, territorial sea, exclusive economic zone and continental shelf, subject to the statutory transitional arrangements.

This has direct relevance to stranded-asset risk.

A bank financing a new Spanish upstream oil/gas project must therefore consider whether the legal framework permits the underlying activity in the first place.

B. Transitional treatment of existing hydrocarbon rights

The law does not simply eliminate every existing hydrocarbon right immediately.

Its Second Transitional Provision addresses existing applications, investigation permits and exploitation concessions.

Among other things, existing permits and concessions in certain maritime areas cannot be extended beyond 31 December 2042.

This creates a significant distinction between:

4. Article 32 and Banking Law

Article 32 is particularly important for banking law.

Spanish credit institutions supervised by the Banco de España and ECB must include information concerning the financial impact of climate-related risks, including transition risks, within prudentially relevant information.

They must also publish specific objectives for decarbonising their loan and investment portfolios aligned with the Paris Agreement.

Therefore, climate risk is not merely an environmental-policy issue.

It becomes part of:

prudential risk management + disclosure + portfolio strategy + credit-risk assessment.

5. Article 33 — Systemic Financial Risk

Article 33 requires the Banco de España, CNMV and Directorate-General for Insurance and Pension Funds to prepare a report every two years concerning:

• alignment with climate objectives;
• future scenarios;
• climate-related risks to the Spanish financial system; and
• measures necessary to mitigate those risks.

This is important because stranded-asset risk can move from an individual loan problem to a systemic banking problem.

For example:

Multiple Spanish banks → finance oil/gas companies → transition policy reduces asset values → defaults increase simultaneously → banks suffer correlated losses.

That is why climate transition risk is also a macroprudential issue.

6. Banco de España's Supervisory Approach

The Banco de España expressly classifies climate-related financial risks into:

1. Physical risks — losses caused by physical climate events.
2. Transition risks — financial losses arising from the transition towards a more sustainable economy.

The Banco de España states that banks should be prepared to identify, measure, manage and disclose climate-related financial risks. Its supervisory expectations address business strategy, governance, risk management and disclosure.

Consequently, a Spanish bank cannot sensibly treat a large oil-and-gas exposure as ordinary corporate lending without considering transition risk.

7. ECB and EBA Rules Relevant to Spanish Banks

Spanish significant banks operate within the EU banking supervisory framework.

The ECB identifies climate and environmental risks as sources of financial risk and expects banks to identify, manage and disclose them.

The EBA Guidelines on the Management of ESG Risks, applicable from 11 January 2026, require institutions to identify, measure, manage and monitor ESG risks, including risks resulting from the transition towards an EU climate-neutral economy.

The EBA framework also requires institutions to consider structural changes in industries and counterparties to which they are exposed.

This is particularly relevant to oil and gas because transition risk can arise at both:

• sector level, and
• individual borrower/project level.

8. How Stranded Asset Risk Becomes Banking Risk

Step 1 — Regulatory transition

Spain and the EU adopt stronger climate policies.

Step 2 — Fossil-fuel project economics change

The expected lifetime of an oil/gas project may shorten.

Step 3 — Asset value falls

Future cash flows are discounted downward.

Step 4 — Borrower's financial position weakens

Debt-service coverage may deteriorate.

Step 5 — Credit risk increases

The probability of default rises.

Step 6 — Collateral becomes less valuable

A specialised refinery, pipeline or extraction asset may have limited alternative uses.

Step 7 — Bank suffers

The bank may experience:

• higher provisions;
• expected credit losses;
• loan impairment;
• collateral losses;
• capital pressure; and
• concentration risk.

9. Major Types of Oil & Gas Stranded Assets in Spain

A. Exploration assets

Exploration rights may become economically useless if new extraction cannot proceed.

B. Production assets

Existing fields can become stranded if production becomes uneconomic before the expected depletion date.

C. Refineries

Refineries may suffer from:

• declining fossil-fuel demand;
• carbon costs;
• changes in transport;
• electrification;
• alternative fuels; and
• environmental regulation.

D. Gas infrastructure

Gas pipelines and related infrastructure may face lower utilisation if demand changes.

E. Corporate reserves

Oil and gas reserves appearing on a company's balance sheet may lose value if they cannot economically be extracted.

F. Bank-financed infrastructure

The most important banking problem arises when the bank's repayment depends upon the future cash flow of the stranded asset.

10. Credit Risk Analysis

A Spanish bank financing an oil/gas company should consider:

Borrower-level analysis

• debt-to-equity ratio;
• cash-flow resilience;
• production costs;
• reserves;
• break-even oil/gas price;
• regulatory exposure;
• carbon costs;
• transition strategy.

Project-level analysis

• project life;
• expected production;
• expected energy demand;
• regulatory permissions;
• decommissioning liabilities;
• environmental liabilities;
• refinancing requirements.

Collateral analysis

The bank should ask:

“What would this asset actually be worth if fossil-fuel demand or regulatory permissions deteriorated?”

This is critical because the historical purchase price is not necessarily the future collateral value.

11. Stress Testing

Stranded-asset risk should be tested through scenarios.

Scenario 1 — Orderly transition

Gradual decline in fossil-fuel demand.

Scenario 2 — Accelerated transition

More rapid regulatory restrictions and technological substitution.

Scenario 3 — Disorderly transition

Delayed climate action followed by sudden regulatory tightening.

A bank could calculate:

Loan Loss = Exposure × Probability of Default × Loss Given Default

with the probability of default and loss given default adjusted under different transition scenarios.

12. Case Laws

There is an important legal qualification: Spanish courts have not yet developed a large body of reported cases directly holding a Spanish bank liable because it financed an oil/gas asset that subsequently became stranded.

The relevant jurisprudence instead comes from:

• Spanish hydrocarbon litigation;
• Spanish constitutional climate cases;
• environmental cases;
• corporate climate litigation; and
• European climate jurisprudence.

These cases help establish the legal environment within which Spanish banking risk must be assessed.

Case 1 — Oil and Gas Capital S.L. v. Kingdom of Spain, Spanish Supreme Court, Judgment 284/2026

This is particularly relevant.

Tribunal Supremo, Judgment No. 284/2026, 9 March 2026, Rec. 238/2023.

Oil and Gas Capital challenged the consequences of Law 7/2021 and sought compensation from the Spanish State.

The company argued that restrictions on new exploitation concessions reduced the value of its hydrocarbon research permits and the investments made in connection with them.

Importance for stranded assets

This case demonstrates that climate-transition legislation can produce a dispute concerning:

regulatory change → reduced expected exploitation rights → reduced asset value → alleged economic loss.

That is essentially the legal mechanism underlying stranded-asset risk.

For banks, the lesson is that the value of collateral cannot be assessed solely by reference to historic investment.

Case 2 — Pyrenees Energy Spain S.A. v. Kingdom of Spain, Spanish Supreme Court, Judgment 240/2026

In Judgment 240/2026 of 2 March 2026, Pyrenees Energy Spain challenged the consequences of Law 7/2021 and claimed State-legislator liability for losses connected with its hydrocarbon interests.

The dispute concerned, among other matters, the company's hydrocarbon research permits and the effect of the 2021 climate legislation.

Banking relevance

A lender exposed to a company whose principal asset consists of hydrocarbon permits must consider the possibility that:

• regulatory changes reduce project value;
• expected exploitation does not occur;
• projected cash flow falls; and
• collateral recovery becomes weaker.

Thus, regulatory litigation itself can become an indicator of transition risk.

Case 3 — Sentencia 90/2022, Spanish Constitutional Court

Spanish Constitutional Court, Judgment 90/2022, 30 June 2022.

The case concerned a constitutional challenge to provisions of Law 7/2021 concerning coastal-domain regulation.

The Constitutional Court rejected the challenge.

Relevance

Although this was not a banking case, it is important because it demonstrates judicial treatment of the broader legal framework established by Law 7/2021.

For banks, legal certainty concerning climate legislation matters because it influences:

• project permissions;
• investment assumptions;
• collateral valuation; and
• long-term cash-flow forecasts.

Case 4 — Sentencia 87/2019, Spanish Constitutional Court

In Judgment 87/2019, the Constitutional Court considered provisions of Catalonia's Climate Change Law.

The legislation included measures concerning energy, transport and climate policy and provisions relating to hydrocarbon exploration and exploitation.

The Court declared several provisions unconstitutional on competence-related grounds, while other provisions were interpreted or maintained.

Banking relevance

This case demonstrates an important principle:

Climate-related regulation must comply with constitutional allocation of legislative powers.

For lenders, this means transition-risk analysis must consider not merely the existence of a climate objective, but also:

• which authority enacted the measure;
• whether it is legally valid;
• whether it survives constitutional review; and
• whether it affects the underlying asset.

Case 5 — Gorraiz Lizarraga and Others v. Spain, ECtHR, 27 April 2004

This case concerned the Itoiz dam project in Navarre, which threatened to flood nature reserves and villages.

The applicants included affected individuals and an association.

The European Court of Human Rights considered the applicants' procedural rights in environmental litigation and recognised the relevance of collective environmental interests where individuals have concrete and direct interests.

Banking relevance

The case illustrates that environmental projects can generate:

• litigation risk;
• delay risk;
• regulatory risk;
• asset-value uncertainty.

For project finance, litigation affecting an environmentally sensitive project can therefore have financial consequences even before a project formally becomes unprofitable.

Case 6 — Milieudefensie v. Royal Dutch Shell, Hague District Court, 26 May 2021

This is one of the most important comparative climate cases.

The Hague District Court ordered Shell to reduce the Shell group's CO₂ emissions by net 45% by 2030 compared with 2019 levels.

The case concerned Shell's corporate policy and emissions from the group, suppliers and customers.

Importantly, the later appeal judgment in 2024 took a different approach and held that Shell had an obligation to counter dangerous climate change but did not establish that the court could impose the particular 45% reduction claimed.

Banking significance

The litigation illustrates how climate obligations can affect the strategic assumptions underlying a fossil-fuel company's business model.

For a bank, this means climate litigation should potentially be considered in:

• credit analysis;
• covenant design;
• project-finance assumptions;
• borrower monitoring;
• scenario analysis.

Case 7 — ClientEarth v. Shell Plc, High Court of England and Wales, 2023

ClientEarth brought a derivative claim concerning Shell directors' management of climate risk.

The claim alleged that the directors had failed to properly manage climate-related risks and referred specifically to the risk of stranded assets.

The High Court ultimately refused permission for the derivative claim to continue.

The court nevertheless recognised that Shell faced material and foreseeable climate-related risks and discussed risks including:

• commercial risk;
• regulatory risk;
• access to capital;
• lower demand;
• lower margins; and
• stranded assets. 

Banking relevance

This case is highly useful for understanding the connection between:

climate risk → corporate strategy → financial risk → governance.

It does not establish that directors automatically breach their duties by financing or operating fossil-fuel assets.

Rather, it demonstrates the legal importance of the board's process for assessing climate-related business risks.

Case 8 — Verein KlimaSeniorinnen Schweiz v. Switzerland, ECtHR, 2024

In this landmark Grand Chamber judgment, the European Court of Human Rights held that Article 8 of the Convention encompasses protection against serious adverse effects of climate change.

The Court found that Switzerland had failed to fulfil certain positive obligations concerning climate-change mitigation and had identified serious gaps in its regulatory framework.

Banking relevance

The case strengthens the wider legal importance of climate-risk regulation.

It does not directly create a duty on Spanish banks to stop financing oil and gas.

Instead, it reinforces the legal environment in which governments, regulators and financial institutions must consider climate-related risks.

13. Case-Law Comparison

14. Duties of a Spanish Bank When Financing Oil & Gas

A bank does not automatically have a statutory obligation to refuse every oil-and-gas loan merely because the borrower operates in the fossil-fuel sector.

The more precise legal question is whether the bank is properly identifying and managing the associated financial risks.

Important areas include:

1. Due diligence

The bank should examine:

• regulatory permissions;
• project lifespan;
• reserves;
• expected demand;
• carbon exposure;
• environmental liabilities;
• decommissioning costs.

2. Credit risk assessment

The bank should determine whether transition scenarios could materially affect:

• revenue;
• EBITDA;
• debt-service capacity;
• collateral;
• refinancing.

3. Governance

Board-level oversight is increasingly important because climate risk can affect the bank's overall business model.

4. Scenario analysis

The bank should examine different transition pathways.

5. Portfolio concentration

Large exposure to one fossil-fuel sector can create correlated losses.

6. Disclosure

Climate-related financial risks must be appropriately incorporated into relevant disclosure frameworks.

15. Covenants in Oil & Gas Finance

Spanish banks can reduce stranded-asset risk through loan documentation.

Possible contractual mechanisms include:

Environmental compliance covenant

Borrower must maintain all environmental and regulatory permits.

Change-in-law covenant

Material regulatory changes affecting the project trigger additional review.

Financial covenant

The borrower must maintain a specified debt-service coverage ratio.

Information covenant

Borrower periodically supplies:

• emissions data;
• reserves information;
• regulatory developments;
• transition strategy;
• asset valuations.

Material adverse effect provisions

A material deterioration in the economic viability of the project can trigger contractual consequences, subject to the precise drafting.

16. Project Finance and Stranded Assets

The risk is particularly significant in project finance.

A project-finance lender generally relies heavily upon the project's future cash flows.

Consider:

€500 million gas infrastructure project
↓
20-year expected operating life
↓
Bank assumes long-term gas demand
↓
Accelerated energy transition
↓
Gas demand declines
↓
Infrastructure operates below capacity
↓
Revenue falls
↓
Debt service weakens
↓
Asset value falls
↓
Bank's recovery value decreases.

This is the classic stranded-asset transmission mechanism.

17. Relationship With Expected Credit Loss

Stranded-asset risk can feed directly into expected credit losses.

A simplified model is:

Expected Credit Loss = PD × LGD × EAD

Where:

• PD = Probability of Default
• LGD = Loss Given Default
• EAD = Exposure at Default

Transition risk can increase PD because the borrower becomes less profitable.

It can also increase LGD because the underlying fossil-fuel asset becomes less valuable.

Thus, the same transition event can affect both sides of the credit-loss calculation.

18. Important Legal Principle

The Spanish framework should not be interpreted as saying:

“Every fossil-fuel loan is unlawful.”

That would be too broad.

The legal issue is instead:

Has the bank properly identified, measured, managed, monitored and disclosed the financial risks created by the transition affecting the borrower's fossil-fuel assets?

That approach is consistent with the Banco de España's supervisory framework and the EU's ESG-risk-management framework.

19. Role of Directors and Senior Management

The board of a Spanish bank should consider whether material oil-and-gas exposures are consistent with:

• the bank's risk appetite;
• regulatory expectations;
• capital planning;
• liquidity planning;
• climate-risk management;
• transition planning;
• concentration limits.

The ClientEarth v Shell litigation is useful comparatively because it demonstrates how climate-risk management can become a question of corporate governance, although that case concerned an oil company rather than a Spanish bank.

20. Stranded Assets and Securities

The risk is not limited to bank loans.

Spanish financial institutions can also face exposure through:

• corporate bonds;
• equities;
• structured finance;
• investment funds;
• derivatives;
• securitisations;
• project-finance securities.

If markets suddenly reprice fossil-fuel assets, the institution may suffer market risk even when the borrower has not yet defaulted.

21. Systemic Risk

Stranded assets can become systemic when multiple financial institutions have correlated exposures.

For example:

Oil company losses
↓
Bank loan deterioration
↓
Higher provisions
↓
Lower profitability/capital
↓
Reduced lending capacity
↓
Broader financial effects

The Spanish legislature expressly recognised climate-related financial-system risk in Article 33 of Law 7/2021.

22. Difference Between Physical and Transition Risk

For oil and gas banking, transition risk is particularly important because the value of reserves and infrastructure depends heavily on assumptions about future demand and regulation.

23. Regulatory Risk vs Credit Risk

The two should not be confused.

Regulatory risk

A law or regulation restricts or changes the activity.

Credit risk

The borrower cannot meet its obligations.

Stranded-asset risk

The underlying asset loses economic value because of changing circumstances.

The three can interact:

Regulatory risk → stranded asset → credit risk.

24. Practical Compliance Framework for Spanish Banks

A Spanish bank financing oil and gas should ideally maintain a framework covering:

1. Asset identification
2. Sector classification
3. Climate-risk screening
4. Regulatory-permission review
5. Cash-flow sensitivity analysis
6. Collateral valuation
7. Scenario analysis
8. Borrower transition assessment
9. Concentration monitoring
10. Board reporting
11. Disclosure
12. Remedial/mitigation measures

The EBA's ESG framework specifically requires institutions to manage ESG risks and prepare for structural changes affecting exposed industries and counterparties.

25. Conclusion

Oil and gas stranded-asset risk in Spain has become a significant banking-law and prudential-risk issue.

The central legal development is Law 7/2021, which connects climate-transition risks with the Spanish financial system and specifically requires credit institutions to assess and disclose the financial impact of climate risks.

The prohibition/restriction on new hydrocarbon exploration and exploitation, together with transitional treatment of existing rights, creates the possibility that some fossil-fuel investments will have shorter or less certain economic lives than originally expected.

The Oil and Gas Capital and Pyrenees Energy Spain Supreme Court litigation is especially relevant because it demonstrates that Law 7/2021 can directly affect the economic value and expected exploitation of hydrocarbon interests.

At the banking level, the key legal principle is therefore risk management rather than an automatic prohibition on fossil-fuel lending. Spanish banks must increasingly incorporate transition risk into credit assessment, collateral valuation, governance, scenario analysis, portfolio management and disclosure. The Banco de España and EBA frameworks reinforce this approach.

Key exam point

In Spanish banking law, oil and gas stranded-asset risk represents a transition risk capable of converting regulatory and climate-policy changes into credit, market, collateral, liquidity and systemic financial risks. Law 7/2021, together with Banco de España/ECB supervision and EU ESG-risk rules, requires these risks to be identified, assessed, managed and disclosed rather than treated as purely environmental concerns.