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Global oil industry write-downs to exceed $150b in 2020

Dubai - A growing number of oil companies 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

The total write-downs of the world’s seven supermajor oil companies and independent producers in the US and Canada are expected to exceed $150 billion in 2020, their highest level in at least a decade.

Oil industry pundits say 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, had nearly every oil and gas company in the world significantly write down the value of its assets this year.

In 2020, dozens of billions of dollars in asset impairments at some of the biggest oil and gas companies known as “Big Oil” came not only from the price collapse but also from significantly lowered expectations of oil prices in the long term, according to Tsvetana Paraskova, analyst with Oilprice.com.

“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 Wall Street Journal’s estimated $145 billion charges the oil industry will have booked for 2020,” wrote Paraskova.

According to the Journal analysis, oil-and-gas companies in North America and Europe wrote down roughly $145 billion combined in the first three quarters of 2020, the most for that nine-month period since at least 2010. That total significantly surpassed write-downs taken over the same periods in 2015 and 2016, during the last oil bust, and is equivalent to roughly 10 per cent of the companies’ collective market value.

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.

The oil industry has written down 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.

According to Oilprice.com, an analysis of oil firms with over $1 billion of market capitalisation 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.

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,” Oilprice.com analysis said.

“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 per barrel,” 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.

Apart from Big Oil, 40 publicly-traded US oil producers also 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 per cent of US liquids production made the largest asset impairments in Q1 2020 since at least 2015, according to EIA estimates.

issacjohn@khaleejtimes.com