Oil and gas sector crisis deepens [GGP]
One after the other major international oil companies (IOCs) are announcing new and massive asset write-downs as a result of the low global oil and gas prices and their impact on their business. These are in effect ‘stranded-assets’ that once had a value but can no longer be produced as a result of low prices and may have to be ‘left in the ground.’
The latest to do so is Shell that announced on June 30 that it is writing off up to $22 billion of the value of its oil and gas assets – about 15 per cent of its market capitalisation. It based this on a reassessment of its long-term oil price forecasts to reflect “the expected effects of the Covid-19 pandemic and related macroeconomic, as well as energy market, demand and supply fundamentals”.
Shell now expects the Brent crude oil price to average $35/barrel this year, $50/barrel in 2021 and only return to around $60/barrel after 2023 – having been close to $70/barrel in December. It also expects US Henry Hub gas price at $2.50/mmbtu (per about 1000 cubic feet), rising to $3/mmbtu after 2023.
Energy executives believe that the pandemic will hold oil and gas prices low for a prolonged period, while the global shift towards cleaner fuels will be accelerating.
In response to this, Shell announced plans in April to become a net-zero emissions energy business by 2050 and is undertaking a review of its organisational structure in light of this.
BP preceded Shell, by announcing $17.5billion asset write-downs on June 15 – about 20 per cent of its market capitalisation. It is taking a more pessimistic view than Shell and expects oil prices to only reach $55/barrel between 2021-2050.
BP expects Covid-19 to have a lasting impact on the global economy and oil and gas demand, accelerating the transition from fossil to cleaner fuels.
On February 12 BP pledged to cut emissions across its operations to net-zero by 2050 and to increase the proportion of investment into non-oil and gas businesses over time. The company is being re-organised accordingly.
Shell’s and BP’s moves constitute the biggest recognition yet among the largest IOCs that tens of billions of dollars’ worth of investment could be rendered uneconomic as the world pursues the Paris Agreement climate goals. Others have reached similar conclusions and are going in the same direction.
Actions by other IOCs
Other European IOCs that took asset action include Italy’s Eni, Norway’s Equinor and Spain’s Repsol.
Eni announced a Q1-2020 net loss of €2.93bn, partly attributed to the book value of assets against market prices as well as impairments from oil-and-gas assets, but may need to do more.
Total took limited impairments of $500 million in 2019, but will also need to do more in 2020.
Equinor and Resol wrote-off $5.25bn and €4.8bn respectively in 2019-2020. Repsol was the first major IOC to pledge net-zero emissions by 2050.
In the US, ExxonMobil responded to low oil and gas prices by writing-down about $2.9bn of assets early May, but analysts expect that it will need to do much more. Morgan Stanley said late June that ExxonMobil is “most exposed” to negative headwinds in the industry. It is expected to make a massive $2.3bn loss in Q2-2020. It is also facing intensifying pressure to act on climate change.
The US second largest oil company, Chevron, wrote-down $10.4bn worth of assets in December. This highlights the difficulties facing shale in the US due to the low oil and gas prices in global markets, that render some shale production uneconomical.
Occidental, the US’ biggest onshore oil producer said on June 25 that it will recognise an after-tax impairment charge of between $6-$9bn in its Q2-2020 results.
Noble Energy took a $4.2bn asset impairment in May related to its US shale assets. This is on top of a $1.16bn asset impairment charge in February. Q2-2020 is expected to be another loss-making quarter.
Quite a few of the independent oil companies operating in US shale regions have gone or are going bankrupt, including Chesapeake Energy – one of the US shale pioneers.
Most IOCs are preparing for the energy transition, but not all have fully reflected these changes in their own oil and gas price outlooks. As a result, many companies are still carrying assets on their balance sheets that were acquired or developed with cost levels that were materially higher than today’s levels – for example Total SA and Eni that still assume over $70/barrel in 2025. They are likely to write-down asset capitalisation in their mid-year financial statements.
The industry expects that such impairments by oil producers may reach up to $300bn this year.
Implications for Cyprus
Q2-2020 will be dismal for all companies due to low oil and gas prices – worse than Q1. Analysts state that it probably will be the end of 2023 before the industry recovers from this crisis, and at the end of it, it will be a different industry that will have to increase efficiency and cut costs to be able to operate profitably in a low price environment.
Already all companies have cut their 2020 capital spending dramatically and are shedding thousands of staff, with further cuts expected. The total may range between 40-60 per cent. Of the companies operating in Cyprus, ExxonMobil is now expected to reduce 2020 capital spending from $31bn to $14bn, Total from $19bn to $7bn, Eni from $8bn to $4.5bn and Noble by more than 50 per cent. What is left can only support core operations. Depending on the level of losses at the end of 2020, 2021 is not expected to fare much better.
These momentous changes are also propelling the oil and gas sector and IOCs is a different direction – especially in Europe – into a low carbon future at the expense of fossil fuels.
Investors increasingly prefer to put their money behind clean energy companies, not companies viewed as part of the problem. This trend will likely broaden in coming years, posing a powerful obstacle for IOCs to navigate.
Sooner or later the IOCs operating in the East Med and in Cyprus’ EEZ will have to reassess their plans and the value of assets already discovered and make decisions on whether it still is commercially viable to develop them. This of course will also have implications on continued exploration, other than existing commitments, if potential discoveries run the risk of remaining stranded.
Dr Charles Ellinas is a senior fellow at the Global Energy Centre of the Atlantic Council @CharlesEllinas
Originally published by Cyprus Mail.
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