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Big Oil’s Nightmare Is Coming True

By Nick Cunningham – Jun 30, 2020, 5:00 PM CDT

Royal Dutch Shell said that it could cut the value of its oil and gas assets by as much as $22 billion, as it takes a dim view of the state of the oil market. The move adds more evidence to the notion that a huge slice of oil reserves will wind up as stranded assets.  Shell cut its Brent oil prices forecast from $60 per barrel to $35 for this year, and lowered its 2021 and 2022 forecasts to $40 and $50 per barrel, respectively, down from $60 previously. The lower outlook reflects the expected damage to the oil market due to the coronavirus and the negative impacts on the global economy, Shell said.

As a result, the value of Shell’s assets will be cut by between $15 and $22 billion. Broken down by segment, Shell’s integrated gas unit will take an $8 to $9 billion hit, mostly related to Australian LNG assets, including its gargantuan Prelude project, a floating LNG vessel, which came in over budget and is now underutilized in a weak LNG market. Shell’s upstream unit will be impaired by $4 to $6 billion, a cut related to Brazil and U.S. shale. Finally, its refining portfolio will be reduced by $3 to $7 billion.

Shell’s gearing, a ratio of equity to debt, will rise by 3 percent due to the impairment.

The massive write down is the company’s largest in more than a decade, and it comes a week after BP also announced a major $17.5 billion impairment. Shell’s write down is a “wake up call” for the industry, according to Credit Suisse.

In April, Shell cut its dividend by two-thirds, upending a longstanding position by the majors to protect shareholder payouts at all costs. It was the first cut to its dividend in about 75 years.

The devaluation of large segments of the oil majors’ business operations is not only a reflection of a temporary downturn in the oil market. The majors are essentially acknowledging that a substantial portion of their oil and gas reserves are going to be left in the ground. Calls to avoid “stranded assets” have floated around for years, sometimes by environmental groups, but increasingly from investor groups and shareholders. Now, the majors themselves are recognizing the reality of stranded assets.

“It’s about fundamental change hitting the entire oil and gas sector,” Luke Parker, vice president, corporate analysis at consulting firm Wood Mackenzie, told the Wall Street Journal. “Within this write down, Shell is giving us a message about stranded assets, just like BP did a few weeks ago.”

Shell’s CEO Ben van Beurden recently said that the company would announce a major restructuring of the company by the end of the year intended to reorient its operations to prepare for the coming energy transition.

BP has already professed a commitment to transitioning to a low-carbon company. The British oil major just announced that it was selling off its entire petrochemical unit, although that move likely has more to do with an effort to raise cash. Indeed, there are questions about how deep the plans for a transformation go, as Drilled News has reported.

While BP and Shell struggle with how to deal with these stranded assets, Exxon Mobil is so far ignoring the issue and has yet to write down any shale assets.

Some accounting experts say Exxon’s stubborn refusal to cut the value of its assets amounts to fraud, according to the Wall Street Journal. A former accountant at the company told the WSJ that Exxon’s refusal to impair part of XTO Energy is part of an “arrogant, aberrant, long-standing…posture.”

The $31 billion purchase of XTO more than a decade ago is widely considered a colossal failure. Exxon bought the shale gas driller at the top of the market. The accountant said that the value of XTO should probably be cut by at least $17 billion, and that Exxon should probably take another $20 billion write down on its other assets. He has sent repeated complaints to the Justice Department over Exxon’s accounting practices. Exxon has denied the allegations.

More broadly, the oil industry could see much larger write-downs as the energy transition appears to be accelerating. Deloitte said that the industry could write-down another $300 billion in assets, after impairing $450 billion over the past 15 years.

By Nick Cunningham of Oilprice.com

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