All the viral effects of Covid on BP, Shell and more
Bp, Shell, Chevron and more. Will Covid Accelerate the Energy Transition? The point of Reenergy
The uncertainty about the future role of Energy Companies recurs to every world economic crisis, whether it originated from a war or was born from a pandemic, such as the one in progress. Probably precisely because they represent the pivot on which the Western economy is founded. But this is a particular crisis, because it is grafted onto a process of profound transformation, which the majors have been undertaking for a long time before Covid-19 manifested itself in all its impetus: the transition to a more sustainable business model from an environmental point of view, which should lead to the gradual move away from hydrocarbons, especially oil.
When the crisis broke out, practically all the large multinationals hit did what they always do on these occasions: reduce investments and announce layoffs. Energy companies have not shied away from the general rule, but some of them have gone a step further by announcing the depreciation of Oil & Gas assets, based on lower oil price forecasts than in the past.
It is as if some majors had decided to tackle the crisis triggered by the pandemic in a prudential logic, on the basis of which, in the post Covid world, demand will no longer pull as before, 100 million barrels a day will no longer be consumed. as in 2019, because the virus has irreversibly changed the habits of the Western population, as regards the way they work, study and travel. So the prices of crude oil, products and gas will be lower than expected until last year and some hydrocarbon production infrastructures will be worth less accordingly.
This is the reason for the large write-downs of BP and Royal Dutch Shell. On June 8, BP CEO Bernard Looney sent a letter to all employees to communicate a 14% reduction in the workforce (about 10,000 out of a total of 70,000 employees), only to announce a week after the largest devaluation since disaster at the Gulf of Mexico Deepwater Horizon platform. Writedowns of two types: a first type, with a value between 8 and 11 billion dollars, which concerns the ownership of plants and equipment, the so-called fixed assets; a second type, which concerns the cancellation of exploration activities, with an intangible value, between 8 and 10 billion dollars. Overall, Looney expects the next quarter to show writedowns of between $ 13 and $ 17.5 billion.
Writedowns which, as mentioned, are based on new forecasts on the price of oil and gas, much more bearish: between 2021 and 2050, BP's new estimates on the Brent price are of an average of 55 dollars / bbl (against a previous forecast of 70 doll / bbl); those on the Henry Hub gas are 2.9 dolls / MMBtu (previously 4 dolls / MMBtu). On the contrary, the estimates on the price of CO2 have been revised significantly upwards: from 40 to 100 dollars / t. Perhaps this is why BP wants more of a future as a “CO2 catcher”, rather than continuing to deal with Exploration and Production and hydrocarbons in general. The decision to sell all the petrochemicals to Ineos, announced at the beginning of July, demonstrates this new direction.
Also in early July, Royal Dutch Shell made its announcement regarding the max-out valuation. In detail, they will be revealed to the market with the publication of the next quarterly financial results, for now it is known that they will be between 15 and 22 billion dollars. Broadly speaking, they will cover three major areas: 8-9 billion dollars for the integrated gas business, which mainly operates in Australia; 4-6 billion for upstream, with the cancellation of some projects in Brazil; 3-7 billion for the downstream, which will be redesigned. Shell also cut its Brent price forecasts: from 60 to 35 for 2020, to 40 for 2021, to 50 for 2022 and to 60 in the long term. For the Henry Hub, the 2020 gas price was cut from 2.75 to 1.75 doll / MMBtu for 2020, 2.5 for 2021 and 2022, 3 for 2022 and beyond. Unlike BP, Shell has not yet announced any layoffs.
Finally, at the very beginning of last week, on 6 July, Eni also joined BP and Shell in downsizing the forecasts on the long-term Brent price and, consequently, in adjusting some balance sheet items for a value of approximately 3.5 billion euro, specifying however that no write-down concerns exploration assets. Furthermore, the Italian energy company has not foreseen any reduction in employment and has reaffirmed its commitment to an effective and sustainable transition through an ambitious and articulated plan in the field of renewables, flanked by a continuous development of the gas supply chain and technology capture and sequestration of CO2.
What about the majors ExxonMobil? The "Big oil" par excellence was the first to reduce investments, but made no announcement to downsize forecasts on oil prices or to adjust the value of some more exposed assets, despite pressure from some shareholders. On the other hand, it was the first to reduce investments. At the start of the lockdown, on April 7, the company led by Darren Woods said it will spend $ 23 billion this year, down 15% from its originally planned $ 33 billion, making cuts in oil and gas projects. For example, the final investment decision on the gigantic LNG plant in Mozambique, pertaining to the Rovuma maxi-deposit discovered by Eni, has been postponed. Furthermore, a month later, together with Chevron and ConocoPhillips, Exxon decided to quota the production of shale oil at only 660,000 b / d until the end of June. Finally, it is precisely in recent days that the indiscretion is about to announce layoffs, limited to the USA, of between 5 and 10% of the workforce. However, Exxon has not yet announced any devaluation of its Oil & Gas assets. On the other hand, its shares are being devalued: since the beginning of the year the stock on the stock market has fallen by 35%, going from 70 to 45 dollars per share.
Chevron also announced layoffs at the end of May, saying it will cut the world workforce by up to 15% (out of a total of about 45,000 employees), because it was violently hit by the shale oil crisis, where it has strong interests. Interests in contrast with the increasingly pressing needs of environmental sustainability, so much so that during the last annual meeting, the shareholders Blackrock and Bnp Paribas managed to get a resolution approved – against the opinion of the board of directors – to make only activities possible carbon neutral lobby. How to turn the knife in the wound. Meanwhile, independent US companies linked to the Permian and EagleFord basins are growing and declaring bankruptcy, most recently Chesapeake, a pioneer in particular of shale gas. While the first to take the books to court, on April 1, was Whiting Petroleum, a shale oil company, based in Denver, Colorado.
The journey for the transformation from oil company to Energy company is a long journey, but by now well established and undertaken for some time. The route has already been outlined, identifying gas as a central element of the transition, converting refineries into bio plants, investing in research on hydrogen and energy storage. Up to now, this path has had a strong need for the propulsive thrust of exploration & production, a very risky activity, which involves ten-year investments, which when it goes badly turn out to be non-repayable.
In seeking an answer to the initial question about the future of Energy companies, the happy didactic story that in August 1992 invented Marcello Colitti, Oxford fellow and former Eni manager, comes to mind to describe the situation at the time of the majors. Compare to a rich sleigh being chased by a pack of ravenous wolves. To save themselves from greed, the sleigh crew is forced to throw a different piece to the wolves each time. At the beginning, the wolves are given control of the production of crude oil, which has been in the hands of OPEC for 60 years, the organization of producing countries, which today also includes Russia; then the futures market is created, which allows banks to earn on fluctuations in the price of crude oil; it continues with the imposition of rules on the composition of petroleum products; we end up with the transfer of the same property, through the listing on the stock exchange. Today, that Colitti is no longer there, one wonders whether upstream activities are also going to be thrown away from the sled to respond to climatic needs. And above all if, once the vehicle has been lightened to the bone, the sled will still be able to carry out its mission: to supply low-cost electricity all over the world, guaranteeing mobility in speed and safety to goods and people.
(Extract from an article published on Rienergia, here the full version)
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/energia/bp-shell-e-non-solo-il-covid-accelere-la-transizione-energetica/ on Sun, 16 Aug 2020 04:39:49 +0000.