Shell takes a hit from the coronavirus downturn
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“Society must remain focused on the longer-term challenge of climate change. Because it hasn’t gone away. It still needs urgent action.” That was the message from Ben van Beurden, Royal Dutch Shell’s chief executive, in a video explaining why the company had in April set an ambition of becoming “a net-zero emissions energy business” by 2050, even though the coronavirus pandemic was raging. He argued that the crisis was “a moment of opportunity” for people to re-evaluate what was important in their lives, “and emerge more united in tackling the urgent challenge of climate change”.
This week, Shell made clear that the pandemic was also having some more immediate impacts on its business. It announced on Tuesday that for the second quarter it would be taking an impairment charge of $15 billion – $22 billion after tax from writing down the valuations of many of its businesses, including LNG in Australia, oil in Brazil, shale oil and gas in North America, and its worldwide refining portfolio.
Although the statement had some superficial similarity to BP’s announcement last month of a large asset writedown of up to $17.5 billion, the underlying issues were different. BP is taking the charge after revising down its long-term real price assumptions for oil and gas, from $70 a barrel to $55 a barrel for Brent crude, and from $4 per million British Thermal Units to $2.90 per million BTU for Henry Hub gas. It has also revised up its assumed carbon price to $100 per tonne of carbon dioxide equivalent in 2030; well above the current weighted average of carbon prices around the world, which is about $17 a tonne.
Shell, by contrast, has left its long-term real price assumptions intact, at $60 a barrel for Brent crude and $3 per million BTU for Henry Hub gas. What has changed sharply is its view of the next few years. It has cut its Brent price assumption for 2020-22 from $60 a barrel, to $35 for this year, $40 for 2021 and $50 for 2022.
The reductions for the Henry Hub gas price are similar. Shell’s previous assumption was $2.75 per million BTU this year and next, and $3 in 2022. Now it is $1.75 this year, $2.50 in 2021 and 2022, and $2.75 in 2023, reaching $3 in 2024.
The changes have had the biggest impact on valuations for Shell’s integrated gas business, mainly in Australia, including the QGC project in Queensland and the Prelude floating LNG project off the north-west coast. The other charges affect upstream assets in Brazil, where Shell has been active in developing deepwater pre-salt resources, and shale operations in the US and Canada.
The one significant change to Shell’s long-term view affects the downstream business. The assumption for average long-term refining margins has been revised down by about 30%, hitting the valuations of Shell’s downstream operations around the world.
The differences between the Shell and BP writedowns result from their different underlying logic. BP’s changed assumptions were linked explicitly to its view on the energy transition and its ambitions for cutting emissions, while Shell is responding to the shorter-term blow from the coronavirus.
However, Luke Parker, Wood Mackenzie’s vice-president of corporate analysis, argued that the bigger picture showed both companies implicitly building strategies around climate risk and the possibility of peak demand for oil.
“Oil and gas demand might well continue to grow from here, and many companies are still chasing a share of that growth,” he wrote. “But make no mistake, the likes of Shell and BP are already positioning for the twilight years.”
BP sells most of its petrochemicals operations for $5 billion
Chemicals are expected to be one of the strongest sources of future demand growth for oil and gas, particularly in a carbon-constrained world. So it was striking to see BP announce on Monday that it is selling most of its remaining petrochemicals operations around the world to Ineos for $5 billion
However, the deal has more to do with BP’s specific position than with the broader state of the industry. BP started to pull back from chemicals in 2005, selling its Innovene business in Europe and the US to Ineos for $9 billion. (Ineos was created with another BP-related deal, when Jim Ratcliffe bought a former BP petrochemicals operation in Antwerp in 1998.)
The latest deal, which sheds all of BP’s petrochemical assets except for the deeply integrated Gelsenkirchen site, is the logical conclusion for operations that were no longer among the group’s core businesses. Bernard Looney, BP’s chief executive, said the overlap between the chemicals operations and the rest of the group was limited, “and it would take considerable capital for us to grow these businesses”.
He added: “As we work to build a more focused, more integrated BP we have other opportunities that are more aligned with our future direction.”
The $5 billion sale proceeds also mean BP can reach its target for $15 billion of asset sales a full year ahead of schedule.
Steve Jenkins, vice-president of Wood Mackenzie’s petrochemicals team, said: “BP held onto these assets in 2005 when they were making strong profits. Now these chemicals businesses are struggling with over-capacity and BP is urgently raising cash.”
Democratic party leaders set out climate proposals
With President Donald Trump sinking in the polls, the possibility of a Democratic administration next year is rising up the agenda for the energy industry. Joe Biden, the presumptive Democratic nominee, had one of the less radical climate and energy plans among the leading contenders to be his party’s candidate, but he is under pressure to be more ambitious.
A select committee of Democrats from the House of Representatives on Tuesday published a report titled “Solving the Climate Crisis”, the fruit of 18 months of work on developing a climate policy programme.
Highlights include plans to stop all greenhouse gas emissions from power generation by 2040, and to have all new cars sold be zero-emissions by 2035. Other proposals that are significant for the energy industry include blocks on new leases for fossil fuel development both onshore and offshore, and stringent regulations to cut methane flaring and leakage.
One idea that is missing from the House committee’s proposals is a ban on hydraulic fracturing, which has considerable support in the Democratic party but is opposed by Biden. But even without that, a change of administration would have profound implications for the energy industry in the US. Biden’s current plans already mark a sharp break from the policies of the Trump administration in areas such as methane leakage regulations and offshore leasing. If he can be persuaded to adopt some of the House committee’s ideas, the contrast would be even more stark.
Coronavirus cases continue to rise in the US
The first wave of coronavirus cases may never have really ended in the US, but it is clear that the second wave is now upon us. The daily number of new reported cases had been falling steadily, but started to pick up again last month. The number of new cases was close to 53,000 on Wednesday: well above the previous peak of about 31,000 a day in early April. Increased testing has played some role, but the proportion of test results coming back positive has also risen.
Dr. Anthony Fauci, the head of the National Institute of Allergy and Infectious Diseases, warned on Tuesday that there could soon be 100,000 new cases a day.
As the numbers of new cases and admissions to hospital have risen, several states have been slowing the pace of reopening, or even locking back down again. Governor Greg Abbott of Texas this week said the virus had taken “a swift and very dangerous turn”, and acknowledged that having allowed bars to reopen so quickly was a mistake. The bars have been closed again, and restaurants limited to filling no more than 50% of their capacity.
Chesapeake Energy plans its exit from Chapter 11
The most striking aspect of Chesapeake Energy’s filing for Chapter 11 bankruptcy protection on Sunday afternoon was how much new capital it is raising. It has secured $925 million of debtor-in-possession financing to allow operations to continue, and it plans to emerge from its restructuring with $2.5 billion in bank debt and $600 million of new equity from a rights issue.
Coming after a steady trickle of E&P bond sales, it is further evidence that there is still capital available to the shale industry, if the conditions are right.
Chesapeake has assets that mean it can potentially generate free cash flow, but not with more than $9 billion of net debt on its balance sheet while West Texas Intermediate crude is at $40 a barrel. Bankruptcy will wipe out $7 billion of that debt, and has a chance of creating a viable business after restructuring.
It seems likely that the equity will be wiped out, but the shares are still being traded over the counter. On Tuesday there was one of those surges that have become familiar in companies going through bankruptcy: the shares were up more than 50% on the day at one point, before falling back again.
At their peak in the summer of 2008, the shares were worth the equivalent of about $14,000 each, allowing for the 200-to-1 share consolidation in April. On Wednesday they were trading at about $4.68.
Tesla’s share price has been on another tear, taking the company past some remarkable milestones. This week its market capitalisation surpassed that of first ExxonMobil and then Toyota. For reference, Tesla reported a GAAP net loss of $862 million for 2019, while ExxonMobil reported net income of $14.3 billion.
The Covid-19 pandemic risks being “a setback for clean energy innovation efforts at a time in which faster progress is needed”, the International Energy Agency warned in a new report in its Energy Technology Perspectives programme.
Saudi Arabia has threatened to restart the oil price war that broke out in March if its fellow OPEC members do not comply with the recent agreements to cut output and to compensate for excess production in the past, the Wall Street Journal reported.
Wind and solar power provided 42% of Germany’s power generation in the first half of 2020. That was more than double the share coming from coal, which was 19.7%.
And finally: with reference to the rise of renewable energy in Germany, I have learned a useful word for describing the challenges that a heavy reliance on solar and wind power can create. An excellent article in Scientific American, about the future role for hydrogen in the energy system, included the German word dunkelflaute, or “dark doldrums”, meaning times and places when there is very little sunshine or wind.
The PONS online dictionary defines dunkelflaute as “a time when solar [and] wind power generation is very low”. It is a testament to the elegance of the German language that it can express in one word a concept that in English takes 11. It is a real problem, too: parts of Europe and the US can experience up to two weeks of dunkelflaute at a time.
Quote of the week
“I can assure [you] that Saudi Arabia will not only be the last producer, but Saudi Arabia will produce every molecule of hydrocarbon and it will put it to good use.” — Prince Abdulaziz bin Salman Al-Saud, Saudi Arabia’s energy minister, spoke last week at the “Don’t forget our planet” virtual conference, organised by the kingdom’s Future Investment Initiative Institute. Asked about the outlook for oil out to 2050, he said he expected Saudi Arabia to be “the last and biggest producer of hydrocarbon even then.”
He also set a goal for the kingdom of generating half its electricity from renewable sources by 2030.
Chart of the week
This comes from a fascinating report on the future of exploration for oil and gas, by Wood Mackenzie’s Andrew Latham and Adam Wilson. There is considerable uncertainty about the outlook for demand for oil and gas, but in any plausible scenario, it is clear that over the next two decades and beyond there will be a significant gap between global consumption and production from fields that are already on stream. The “supply gap” created in that way could be 460 billion barrels of oil equivalent by 2040, even in a world that is on course to limit the rise in global temperatures to 2°C.
This chart showing the outlook for oil makes the point very clearly. In Wood Mackenzie’s base case, labelled the ETO (Energy Transition Outlook), oil demand is about 114 million barrels a day in 2040. In the 2-degree scenario it is much lower, at just 66 million b/d. But even then, it is well above expected production from proven developed fields of about 19 million b/d. Some of this gap can be filled from existing discoveries, but many of the known resources will be expensive to develop. So there is a continued role for exploration in discovering lower-cost resources that can be developed economically even in a world where demand is falling.