Why Are Oil Companies' Assets Dropping in Value?

BP and Shell are the latest majors to be hit by the aftermath of the COVID-19 pandemic, with both companies writing off billions of dollars’ worth of oil and gas assets. In previous energy downturns, prices have plummeted, but majors have maintained confidence in their assets. The coronavirus pandemic has forced many producers to abandon this buoyant attitude, with a sharp and potentially persistent drop in demand prompting companies such as BP and Shell to reassess the value of their assets.

Analysts have interpreted the revaluation as a powerful indicator that the COVID-19 pandemic could fast-track a worldwide transition away from fossil fuels. As a result, billions of dollars’ worth of assets and infrastructure invested in the oil and gas industry could be written off as companies reassess the long-term oil and gas demand outlook.

Demand set to fall as world pivots towards renewables

For Royal Dutch Shell, the demand-crushing pandemic combined with the escalating climate change crisis has resulted in a devaluation of oil and gas assets to the value of US$22 billion. Its liquefied natural gas assets took the biggest hit, with around US$9 billion wiped off the total value. According to Shell, the cuts are part of its long-term plan to “support the decarbonisation of its energy product mix” and pivot towards a greener future.

The announcement followed a similar move made by BP, with the British-owned company pledging to reduce the net worst of its assets by US$17.5 billion. BP says the decision was made in anticipation of a faster transition to clean, low-carbon energy in the wake of the COVID-19 pandemic. By 2050, both companies say they hope to eradicate greenhouse gas emissions completely. As well as devaluing its assets, the companies admitted some of its forthcoming projects may never be developed in the face of falling demand and prices.

A “turning point” for asset valuation

"I think we may look back on this as the turning point, the moment the industry finally started to say that real assets with real dollar figures associated with them are likely to be 'stranded'"- or left undeveloped -"in a decarbonising world," says Andrew Logan, Senior Director of Oil and Gas at non-profit sustainable business advocacy organisation, Ceres. "This is a huge turnaround from the industry's previous stance, which had been that no existing assets were likely to be stranded, that there may be risks in the future, but not in the here and now. That acknowledgment, that the risk is real and it's here in the present, is a really big deal."

While companies such as BP and Shell are beginning to voluntarily reassess the value of their fossil fuel investments, others are resisting. For example, despite tumbling oil prices and growing climate change awareness, ExxonMobil says there is minimal risk in its latest 2020 Energy & Carbon Summary.

Want to know more about how the COVID-19 pandemic is reshaping the oil and gas landscape? ‘ATEX and IECEx Covid-19 and Brexit’ features insight from Ron Sinclair on behalf of SGS Baseefa.