Shell has warned it will slash up to $22bn (£18bn) from the value of its oil and gas assets as it counts the cost of falling fossil fuel prices during the Covid-19 pandemic.
The Anglo-Dutch oil major expects the collapse in oil demand during the coronavirus crisis to drag on global oil prices for at least three years, wiping billions from the value of its fossil fuel reserves and casting doubt on whether new discoveries will be developed.
In a market update on Tuesday, the oil company said it had cut its oil price forecasts and would probably need to take a post-tax impairment charge of between $15bn and $22bn on its global oil and gas assets spanning Australia, Brazil and North America.
Shell expects Brent crude prices to average about $35 a barrel for the rest of 2020, before rising to $40 next year and $50 by 2022. The forecasts are sharply below the oil prices expected by Shell only three months ago, which averaged about $60 a barrel for each year to 2022.
Brent crude prices were trading at $41.47 a barrel on Tuesday morning.
Shell’s decision to cut the value of its global portfolio comes just weeks after rival BP announced it would reduce the value of its own assets by $17.5bn, its largest writedown in a decade, after cutting its own 30-year energy price forecasts by a third.
Shell expects its gas business to take the heaviest financial toll, less than four years after becoming one of the world’s largest players in the liquified natural gas market following its $53bn acquisition of BG Group.
The value of its integrated gas business, the bulk of which is based in Australia, will take a financial hit of between $8bn to $9bn. Its oil refinery assets are likely to face a charge of between $3bn to $7bn while the value of its “upstream” exploration and production assets fall by $4bn to $6bn, largely due to its Brazilian and North American shale business.
Nicholas Hyett, an equity analyst at Hargreaves Lansdown, said the multibillion dollar downgrades to Shell’s portfolio were not “overly surprising” following the severe slump in global oil prices.
“Oil prices are lower, and expected to stay low for some time. As a result, the value of the oil Shell is 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,” he said.
“The real question is whether Shell’s fairly downbeat expectations are downbeat enough.” Hyett added. “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.”
Shell’s update sent its shares down 2% to £13.10 on Tuesday morning, making it one of the the biggest fallers on the FTSE 100.
The company has lost about 40% of its market value since the start of the year, and cut its shareholder payouts for the year by two-thirds in Shell’s first dividend cut since the second world war.
Shell told investors it plans to cut spending by $9bn to weather the collapse in oil market prices in the wake of the coronavirus outbreak. Global fuel demand has plunged to 25-year lows during the pandemic, as steps to fight the disease have grounded planes, cut vehicle usage and curbed economic activity.