BP will slash up to $17.5bn off the value of its oil and gas assets after taking a more downbeat view of longer-term oil prices in the wake of the coronavirus pandemic, which it expects to hasten the shift away from fossil fuels.
The UK energy major said on Monday that coronavirus would have a lasting impact on the global economy as well as on oil and gas demand, and that it expected the crisis to accelerate the transition towards cleaner energies.
Its move is the biggest recognition yet among the largest oil and gas players that tens of billions of dollars worth of investment could be rendered uneconomic as the world pursues the Paris climate goals.
It also puts into focus BP’s debt levels — among the highest in the sector — and its dividend, which it has maintained despite energy analysts arguing that it is unsustainable. Shares in the company fell about 2 per cent on Monday.
Under new chief executive Bernard Looney, BP is undertaking an overhaul of its business as it seeks to become a leaner organisation and a net zero-emissions company.
BP like its rivals has been under pressure from climate activists and shareholders to take responsibility for the emissions that are released from the burning of its fuels.
In September, it will tell investors how it plans to “reinvent” itself and what its pledge to invest less in oil and gas and more in renewables over time will mean in practice.
“This is a clear acceptance by BP that the past is no longer a guide to the future,” said Natasha Landell-Mills, head of stewardship at asset manager Sarasin & Partners. “Until your accounts are aligned with Paris, your capital spending will not be aligned.”
BP’s price assumptions for Brent crude oil and Henry Hub, the natural gas benchmark, are now lower by 27 per cent and 31 per cent, respectively, for the 2020 to 2050 period from 2019 levels. The company now assumes an average of about $55 a barrel for Brent crude and $2.90 per million British thermal units for Henry Hub gas.
BP said it would now review some of its exploration plans, meaning some of the oil it expected to produce will be left in the ground.
It expects to announce non-cash, post-tax impairment charges and exploration write-offs of $13bn to $17.5bn in the second quarter.
The company drew a distinction between the pre-tax impairments taken against property, plant and equipment of $8bn to $11bn, and write-offs of “intangibles” related to exploration of $8bn to $10bn.
“These difficult decisions — rooted in our net zero ambition and reaffirmed by the pandemic — will better enable us to compete through the energy transition,” Mr Looney said in a statement on Monday.
As of March 31, property, plant and equipment was valued at $130.2bn — with the oil and gas component at $88.6bn. BP said intangible assets were tallied at $15.5bn, with $14.2bn related to exploration.
Last month, Mr Looney told the Financial Times the pandemic might have ushered in “peak oil” demand. “It’s not going to make oil more in demand. It’s gotten more likely [oil will] be less in demand,” he said, adding that the remote working, which had reduced the need for travel, could persist.
Some investors, including Sarasin, have long said that oil majors’ use of overly optimistic long-term price assumptions had led them to overstate their capital, earnings and ability to pay out dividends.
Biraj Borkhataria of RBC Capital Markets said BP’s balance sheet now looked “stretched”, meaning that the company’s dividend would probably need to take a cut as gearing rises towards 48 per cent.
BP had already announced an impairment charge of almost $3bn after agreeing to sell a parcel of US assets for less than the value on its books as energy prices fell.
Shell, too, has announced a writedown of $2bn, following more than $10bn in impairment charges by US rival Chevron. Spain’s Repsol and Norway’s Equinor have also cut their asset values in recent months.
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