2020 was one of the worst years for oil depreciation

The pandemic has caused the biggest revision of the value of the oil industry’s assets in at least a decade, as companies soured on expensive projects amid the prospect of low prices for years.

Oil and gas companies in North America and Europe amassed about $ 145 billion in the first three quarters of 2020, the most for that nine-month period since at least 2010, according to a Wall Street Journal analysis. The total significantly exceeded the depreciation that was during the last oil fuel during 2015 and 2016 over the same periods and is equivalent to about 10% of the companies’ combined market value.

Companies in the major Western economies are writing down more of their assets during the coronavirus pandemic than they have had in years. According to an analysis of data from S&P Global Market Intelligence, the oil industry has written off more than any other major segment of the economy following an unprecedented collapse in global energy demand.

Oil producers regularly write down assets as commodity prices collapse as cash flows from oil and gas properties decline. This year’s industry-wide reassessment is one of the strongest ever, as oil companies also have longer-term uncertainty about future demand for their main products amid the rise of electric motors, the rise in renewable energy and growing concerns about the lasting impact of climate change. .

European large oil companies Royal Dutch Shell RDS.A -0.31%

PLC, BP ​​BP -0.71%

PLC and Total SE were one of the most aggressive cutters, accounting for more than one-third of write-offs in the industry. US shale producers, including Concho Resources Inc.

and Occidental Petroleum Corp.

recorded more impairment than in the past four years combined. The data, which covers the first three quarters of 2020, excluded Exxon Mobil Corp’s

recently announced that it will write off up to $ 20 billion in the fourth quarter and the $ 10 billion Chevron Corp.

hacked late in 2019.

The journal’s analysis included data from S&P Global Market Intelligence, Evaluate Energy Ltd. and IHS Markit reviewed impairments taken by large oil companies and independent oil producers with a market value of more than $ 1 billion based in the US, Canada and Europe.

Regina Mayor, who is leading KPMG’s energy practice, said the write-offs not only represent the reduced short-term value of the assets, but that many companies believe that oil prices can never fully recover.

“They are working on the fact that the demand for the product will decrease, and the depreciation is a harbinger of that,” she said. Mayor said.

U.S. accounting rules require companies to write off an asset if the projected cash flow falls below its current book value. Although an impairment loss does not affect a company’s actual cash flow, it can increase its borrowing costs by increasing its debt burden compared to its assets. Companies are also expected to record impairment losses as earnings costs.

For the oil industry, the revaluation comes at the end of an era in which an apparent scarcity of energy supply has rushed to buy up fossil fuel reserves, including U.S. shale deposits and Canadian oil sands. Some of the assets they have created require higher oil prices that prevailed earlier in the decade to be profitable. But after U.S. frackers released large amounts of oil and gas, there have been two oil rigs over the past five years and Brent oil, the global benchmark, last reached $ 100 a barrel in 2014.

Shell’s Queensland Curtis liquefied natural gas project in Australia is also part of its write – offs.


Patrick Hamilton / Bloomberg News

Concerns about long-term demand exacerbate the oversupply of fossil fuels, and companies say they have become more selective about where they invest. Projects are experiencing a much tougher competition to capital amidst sufficient inventory. BP, Shell and Chevron cite internal forecasts for lower commodity prices as the cause of the declines.

BP believes the coronavirus pandemic could have a lasting impact on the economy, CEO Bernard Looney said in June when the company announced write-offs. “We have re-established our price outlook to reflect the impact and the likelihood of greater efforts to ‘better rebuild’ a world that is stable in Paris,” Looney said, referring to the carbon emissions targets of the Paris Climate Accords .

Exxon said in November it had strategically evaluated the profitability of its assets under current market constraints and would reduce the value of some assets by $ 17 billion to $ 20 billion.

The type of assets the companies write down range from US shale gas properties to mega-foreign projects and intangible assets.

Shell said its write-offs were mainly related to the Queensland Curtis liquefied natural gas project in Australia and its giant floating gas plant, Prelude, which struggled to generate revenue after years of delays and cost overruns. The pandemic has led to a restructuring of the company, partly to refocus on the oil that has the highest value it produces, while also accelerating investments in low-carbon energy.

Last week, Shell announced another write-off of between $ 3.5 billion and $ 4.5 billion, partly against the oil and gas project Appomattox in the Gulf of Mexico.

In the coming years, increased competition from renewable energy and policy changes toward fossil fuels could cause further reviews of the oil and gas assets’ ability to generate future cash flows under U.S. accounting rules, says Philip Keejae Hong, a professor of accounting at the University of Michigan . . He said that rapidly growing renewable energy could reduce the asset value of the industry over time.

‘It’s not like one company [is] take a bad step, ‘said Mr. Hong said. “This is a threat that the industry faces in the long run.”

Write to Collin Eaton at [email protected] and Sarah McFarlane at [email protected]

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