The pandemic has triggered the largest revision in the value of the oil industry’s assets in at least a decade, as companies have embarked on costly projects against the prospect of low prices for years.
Oil and gas companies in North America and Europe noted about $ 145 billion combined in the first three quarters of 2020, mostly for that nine-month period of at least 2010, according to a Wall Street Journal analysis. . This total significantly exceeded the reductions recorded in the same periods in 2015 and 2016, during the last oil bust, and is equivalent to about 10% of the collective market value of companies.
Companies in major Western economies write more of their assets during the coronavirus pandemic than they have in recent years. But the oil industry has shrunk more than any other major segment of the economy, following an unprecedented collapse in global energy demand, according to an analysis of data from S&P Global Market Intelligence.
Oil producers frequently note assets when commodity prices plummet as cash flows from oil and gas properties decline. This year’s revaluation of the industry is one of the strongest of all time, as oil companies also face long-term uncertainties about future demand for their main products amid rising electric cars, the proliferation of renewable energy and concerns increasing on the sustainable impact of climate change.
Major European oil companies Royal Dutch Shell RDS.A -0.31%
PLC, BP BP -0.71%
PLC and Total SE were among the most aggressive millers, accounting for over a third of the industry’s depreciation this year. American shale producers, including Concho Resources Inc.
and Occidental Petroleum Body.
they have recorded more depreciations than they have had in the last four years combined. The data, which covered the first three quarters of 2020, excluded Exxon Mobil Body
recently announced plans to write up to $ 20 billion in the fourth quarter and $ 10 billion Chevron Body.
reduced at the end of 2019.
The Journal’s analysis analyzed data from S&P Global Market Intelligence, Evaluate Energy Ltd. and IHS Markit on depreciation by major oil companies and independent oil producers with a market value of more than $ 1 billion, based in the United States. Canada and Europe.
Regina Mayor, who runs KPMG’s energy practice, said the cuts represent not only the diminished short-term value of assets, but also the belief of many companies that oil prices will never fully recover.
“They will face the fact that the demand for the product will decrease, and the discounts are an announcement in this regard,” said Ms. Mayor.
US accounting rules require companies to note an asset when its projected cash flows fall below its current carrying amount. Although a depreciation does not affect a company’s real cash flow, it can potentially increase its borrowing costs by increasing the debt burden on its assets. Companies are also required to record impairment as an expense.
For the oil industry, the revaluation comes at the end of an era in which a perceived shortage of energy supply has driven a rush to buy fossil fuel reserves, including US shale deposits and Canadian oil sands. Some of the assets they have obtained require higher oil prices, which prevailed at the beginning of the decade, in order to be profitable. But after U.S. frackers unleashed vast sums of oil and gas, there have been two busts of oil in the past five years, and Brent oil, the global benchmark, last surpassed $ 100 a barrel in 2014.
The Shell Queensland Curtis project with liquefied natural gas from Australia is also part of its reductions.
Photo:
Patrick Hamilton / Bloomberg News
Concerns about long-term demand exacerbate the excess supply of fossil fuels, and companies say they have become more selective about where they invest. Projects face much tougher competition for capital amid sufficient quantities. BP, Shell and Chevron cited domestic forecasts for lower commodity prices as the cause of the depreciation.
BP believes the coronavirus pandemic could have a lasting impact on the economy, chief executive Bernard Looney said in June when the company announced cuts. “We’ve reset our price prospects to reflect that impact and the likelihood of greater efforts to ‘rebuild better’ towards a consistent world in Paris,” Looney said, referring to the carbon emissions targets of the climate agreements. of Paris.
Exxon said in November that it had strategically assessed the return on its assets under current market constraints and would reduce the value of its assets by $ 17 billion to $ 20 billion.
The types of assets that companies note range from US shale gas properties to mega-offshore projects and intangible assets.
Shell said its reductions are mainly related to its liquefied natural gas project in Queensland Curtis, Australia, and its giant floating gas plant, Prelude, which has struggled to provide revenue after years of delays and cost overruns. The pandemic triggered a restructuring of the company, in part to focus on the highest value oil it produces, while accelerating low-carbon energy investments.
Last week, Shell reported another $ 3.5 billion to $ 4.5 billion downgrade, in part against its Appomattox deepwater oil and gas project in the Gulf of Mexico.
In the coming years, increased competition due to renewable energy and changes in fossil fuel policies could trigger further analysis of the ability of oil and gas assets to generate future cash flows in accordance with US accounting rules, he said. Philip Keejae Hong, professor of accounting at Central Michigan University. Fast-growing renewable energy, he said, could wipe out industry assets over time.
“It’s not like one company [is] making a bad move, “Mr. Hong said. “It’s a long-term threat to the industry as a whole.”
Write to Collin Eaton at [email protected] and Sarah McFarlane at [email protected]
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