It has been reported that Royal Dutch Shell will slash $22 billion from the value of its assets due to the COVID-19 pandemic and falling oil prices.
Shell has warned that significant adjustments to longer term oil price and interest rate expectations will result in impairments of $15bn-$22bn to the value of its assets in the second quarter.
However, production and utilisation is now set to be at the higher end of April’s expectations, or even above, across all divisions
Nicholas Hyett, Equity Analyst at Hargreaves Lansdown, comments: “There’s nothing overly surprising about this announcement. Oil prices are lower, and expected to stay low for some time. As a result the value of the oil Shell’s set to pump in future is lower and the accountants have got the red pens out to mark down the value of Shell’s reserves.
“That’s not to say these numbers can be glossed over. Lower oil prices mean lower margins and lower profits, despite production coming in ahead of previous expectations. Meanwhile cuts to asset valuations have increased gearing – the key debt ratio for oil & gas groups and the number Shell was trying to keep under control when it cut the dividend earlier in the year.
“The real question going forwards is whether Shell’s fairly downbeat expectations are downbeat enough. Oil prices have spent a large part of the last five years under $60 a barrel and while the collapse of several large US shale names might reduce global supply, the outlook for demand is hardly robust.”
Michael Bradshaw, Professor of Global Energy at Warwick Business School, comments: “How individuals, governments, and businesses respond to the COVID-19 crisis in the months ahead will have long-term implications for the environment and the future of oil-producing companies and countries.
“After the financial crash in 2008 there was a rapid rebound in the use of fossil fuels. Within two years we returned to the same path of growing carbon emissions we would have been on if the crisis never happened.
“World leaders face a similar decision this time. They could aim for another quick and dirty recovery, increasing fossil fuel consumption to get the economy back on track, or they can double down on the promises of clean, green growth outlined in the Paris agreement and treat the recovery as an opportunity to decarbonise their economies.
“Environmental groups are already lobbying to prevent the Paris agreements becoming another casualty of the pandemic, stressing the need for a Green New Deal. If they are successful, demand for oil might never return to the peak we saw prior to COVID-19.
“For example, there is no guarantee the transport sector will fully recover. After the pandemic, we might have a different attitude to international air travel or physically going into work.
“This will create huge challenge for oil producers, especially if demand and prices fail to recover sufficiently to support a managed transition to a more sustainable future.”