The 2020 oil price collapse provided a reality check for the global oil and gas industry, which reassessed its price assumptions for the years ahead and readjusted the value of its assets.
Expectations that oil demand will not see a V-shaped recovery in 2020 and longer-term industry challenges, including the rise of renewables and electric vehicles (EVs), had nearly every oil and gas company in the world write down, significantly, the value of its assets this year. The 2020 write-downs of Big Oil and independent producers in the U.S. and Canada have reached their highest level in at least a decade, various analyses show. And the latest available financials for Q3 were not the end of asset impairments, announcements for which continued in the fourth quarter.
The reassessment of oil and gas assets was so widespread that even U.S. supermajor ExxonMobil—which until a month ago hadn’t really adjusted the value of its assets in many years—warned of massive write-downs of between $17 billion and $20 billion after-tax in Q4 in its gas assets in the United States, Canada, and Argentina, due to the pandemic and its effect on the industry. Even without Exxon’s massive write-down announced in Q4, the oil industry in the U.S., Canada, and Europe wrote down a combined $145 billion in oil and gas assets in the first nine months of 2020 alone—the highest since at least 2010 and representing around 10 percent of the companies’ combined market capitalizations, an analysis by The Wall Street Journal showed.
The analysis of oil firms with over $1 billion of market capitalization in North America and Europe found that the write-downs during the first three quarters of 2020 were much higher than the ones the companies incurred during the previous downturn in 2015-2016.
This year, dozens of billions of U.S. dollars in asset impairments at some of the biggest oil and gas companies came not only from the price collapse but also from significantly lowered expectations of oil prices in the long term.
Since the end of September, more write-downs have been announced, taking the total 2020 tally well beyond $150 billion. Exxon’s asset impairment of up to $20 billion for Q4 and Shell’s latest warning of another up to $4.5 billion write-down for Q4 would add to the Journal’s estimated $145 billion charges the oil industry will have booked for 2020.
Shortly after the price crash in March, Big Oil started announcing hefty asset impairments, which most European majors explained with lowered oil price assumptions for the coming years and an “enduring impact” of the pandemic.
BP, Shell, Eni, and Total all took major write-downs, with the French supermajor even qualifying Canadian oil sands projects Fort Hills and Surmont as “stranded” assets— meaning with reserves beyond 20 years and high production costs, whose overall reserves may not be produced by 2050.
“Beyond 2030, given technological developments, particularly in the transportation sector, Total anticipates oil demand will have reached its peak and Brent prices should tend toward the long-term price of 50$/b, in line with the IEA SDS scenario,” Total said in July.
BP’s asset write-down of $17.5 billion for Q2 has significant short and long-term implications, Luke Parker, vice president, corporate analysis, at Wood Mackenzie said in June.
“In the longer term, this is about BP’s strategic shift away from oil and gas. While that will be a multi-decade affair, BP is already getting to grips with the idea that its upstream assets are worth less than it believed as recently as six months ago. Indeed, some of them are worth nothing,” Parker noted.
It’s not only Big Oil that has revised down the value of their assets in the wake of the price crash.
Forty publicly-traded U.S. oil producers wrote down a collective $48 billion worth of the value of their assets in the first quarter of 2020 alone, data analyzed by the Energy Information Administration (EIA) showed in July. The 40 companies—including Occidental, Apache, Concho Resources, ConocoPhillips, EOG Resources, Marathon Oil, Noble Energy, and Parsley Energy—representing around 30 percent of U.S. liquids production made the largest asset impairments in Q1 2020 since at least 2015, according to EIA estimates.
In 2020, the major difference compared to 2015 is that a growing number of oil companies around the world have started to acknowledge not only the short-term price impact on their assets but also the long-term implications of the energy transition and socially responsible investing.
By Tsvetana Paraskova for Oilprice.com
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