Luke Parker, vice president, corporate analysis at Wood Mackenzie, says: ‘The impairment Shell has announced is about more than an accounting technicality, or an adjustment to near-term price assumptions - it’s about fundamental change hitting the entire oil and gas sector.’
In a Q2 2020 update note published today, Shell has provided a stark – and bleak – snapshot of the extent to which the coronavirus and the resulting macroeconomic shock has impacted its oil and gas businesses
In Q2, Shell has revised its mid and long-term price and refining margin outlook to reflect the economic fallout from the pandemic as well as energy market demand and supply fundamentals. As a result, the company has flagged up the expectation of aggregate post-tax impairment charges in the range of $15 to $22 billion for the second quarter.
Shell has revised down its forecast for Brent crude prices to an average of around $35 a barrel for the rest of the year, with an increase to $40 in 2021 and $50 in 2022. This compares to a previous forecast of incremental annual rises of $60 per barrel out to 2022.
Refinery utilisation is now expected to be between 67% and 71%, and gross refining margins are expected to be ‘significantly lower’ compared with Q1 2020.
Oil products sales volumes are anticipated to be between 3,500 and 4,500 thousand barrels per day, driven by a significant drop in demand related to the impact of the coronavirus.
Responding to Shell’s performance update Angus Rodger, a director with Wood Mackenzie’s upstream research team, said: ‘The major oil companies are going through a process of reassessing long-term oil price assumptions and investment hurdle rates as a result of the oil price crash and the coronavirus.
‘BP and Shell are just two of the companies that have announced recent changes. Cutting long-term price assumptions will generally result in a lower valuation, for certain assets to below the accounting value held on the balance sheet. That’s what will trigger an impairment charge.
‘This process has further to run, and we expect further large impairments to occur across the sector.’
Rodger added that the price crash and pandemic has already wiped US$1.6 trillion off WoodMac’s valuation of the global upstream sector.
Luke Parker, vice president, corporate analysis at Wood Mackenzie, also commented: ‘The impairment Shell has announced is about more than an accounting technicality, or an adjustment to near-term price assumptions. It’s about fundamental change hitting the entire oil and gas sector.
‘Within this write down, Shell is giving us a message about stranded assets, just like BP did a few weeks ago.’
Parker sees this as part of a wider trend.
‘Just a few years ago, few within the oil and gas industry would even countenance ideas of climate risk, peak demand, stranded assets, liquidation business models and so on. Today, companies are building strategies around these ideas,’ he said.
‘Demand might still grow from here, and many companies are still chasing a share of that growth. But make no mistake, the corporate landscape is changing, and the majors are changing with it.’