- Global petro-chemicals company, Shell, warned this morning it may write down assets to the value of up to US$22 billion.
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Angus Rodger, a director with Wood Mackenzieโs upstream research team, said: โThe 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.
โBP 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. Thatโs what will trigger an impairment charge.
โโThis process has further to run, and we expect further large impairments to occur across the sector.โ
Rodger added that the price crash and pandemic has already wiped US$1.6 trillion off WoodMacโs valuation of the global upstream sector.
Luke Parker, vice president, corporate analysis at Wood Mackenzie, said: โThe impairment Shell has announced is about more than an accounting technicality, or an adjustment to near-term price assumptions. Itโs about fundamental change hitting the entire oil and gas sector.
โWithin this write down, Shell is giving us a message about stranded assets, just like BP did a few weeks ago.โ
Parker sees this as part of a wider trend.
โJust 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,โ he said.
โDemand 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.โ
Author: Bryan Groenendaal
Source: Woodmac