The COVID-19 pandemic has caused the biggest review in the value of the oil industry’s assets in at least a decade, with companies facing the dilemma of costly projects amid the prospect of years of falling prices.
In North America and Europe, oil and gas companies fell by about $145 billion combined in the first three quarters of 2020, the largest value during a nine-month period since at least 2010. This total significantly exceeds the cuts that occurred in the same period of 2015 and 2016, during the last oil recession. This is equivalent to about 10 percent of the companies’ collective market value.
According to the newspaper, companies in major Western economies wrote down more of their assets during the Corona pandemic than they had in years. But the oil industry suffered more than any other major sector, after an unprecedented collapse in global energy demand, according to an analysis of SNP Global Market Intelligence data.
She added that oil producers write down assets when commodity prices collapse, as cash flows from oil and gas properties dwindle. This year’s industry-wide reassessment is among the strongest ever, because oil companies also face long-term uncertainty about future demand for their key products amid the rise of electric vehicles, the spread of renewable energy and growing concern about the lasting impact of climate change.
American accounting rules
European oil majors Royal Dutch Shell and Total have been among the most aggressive producers, accounting for more than a third of the industry’s cuts this year.
US shale oil producers, including Concho Resources Inc and Occidental Petroleum Corp, recorded a larger decline than in the past four years combined. The data, which included the first three quarters of 2020, excluded Exxon Mobil’s recently announced plan to write off up to $20 billion in the fourth quarter, and Chevron, which was worth $10 billion in late 2019, declined. .
US accounting rules require companies to write down an asset when expected cash flows fall below its current book value. Although an impairment does not affect a company’s actual cash flow, it potentially raises borrowing costs by increasing the debt load relative to assets, and companies are required to record impairments as dividend charges.
An analysis of data by “SNP Global Market Intelligence” and “IHS Markit” reviewed the declines taken by major oil companies and their independent producers with a market value of more than one billion dollars in the United States, Canada and Europe. Regina Mayor, who leads KPMG’s energy practice, said the downgrades represent not only the short-term diminishing value of assets, but also the belief by many companies that oil prices may never fully recover
Oil and energy supply industry
For the oil industry, the reassessment comes at the end of an era in which perceived scarcity of energy supplies led to a rush to buy up fossil fuel reserves, including US shale deposits and Canadian Oil Sands. Some assets require higher oil prices than prevailed earlier this decade to be profitable.
But after American refiners released huge quantities of oil and gas, there were two oil declines in the past five years, while the last time Brent oil exceeded the global standard of $100 per barrel was in 2014.
Reviews of oil and gas asset capacity
Companies say they have become more selective about where they invest, as projects face tougher competition for capital amid abundant supplies.
BP, Shell and Chevron cited internal forecasts of lower commodity prices as a reason for the declines.
BP believes that the Corona pandemic may have a lasting impact on the economy, as CEO Bernard Looney said last June, when the company announced writedowns.
“We have reset our price forecasts to reflect this impact and the potential for greater efforts to build back better toward a Paris-compatible world,” he added, referring to the carbon emissions targets in the Paris climate agreements.
Exxon said in that it had conducted a strategic assessment of the profitability of its assets in light of current market restrictions, and would reduce the value of some of them by about $17 billion to $20 billion.
The types of assets that companies record range from shale gas properties in the United States to large offshore projects and intangible assets.
Shell said the write-downs mainly relate to its Queensland Curtiss LNG project in Australia and the giant Prelude floating gas facility, which is struggling to generate income after years of delays and cost overruns.
The pandemic has led to a partial restructuring of the company, to refocus on higher-value oil, while accelerating investments in low-carbon energy.
In the coming years, increased competition from renewable energy and policy changes toward fossil fuels may lead to further reviews of the ability of oil and gas assets to generate future cash flows under US accounting rules, said Philip Kijae Hong, an accounting professor at Central Michigan University.
He believes that rapidly growing renewable energy could reduce the values of the industry’s assets over time, adding, “It is not as if one company is making a bad move, but rather it is a threat that the industry as a whole face in the long term.”
