Short-term oil demand destruction has already taken its toll on the balance sheets of producers such as Shell
Short-term oil demand destruction has already taken its toll on the balance sheets of producers such as Shell © AFP via Getty Images

European oil companies have publicly accepted the energy transition from fossil fuels to a zero carbon economy. Now they are trying to outdo one another with updated oil price forecasts and carbon output targets. On Tuesday, Royal Dutch Shell announced its latest outlook — $60 per barrel long-term — and adjusted down expected returns on energy projects accordingly. Yet the changes are more to do with the impact of coronavirus on near-term prices than the surrender of fossil fuels.

Shell’s asset impairments are still big at up to $22bn post tax in a non-cash charge for the second quarter. The previous $60 real Brent price assumption which ran through 2022 now drops by as much as half (using this year’s real dollars). After that, the long-term price of oil climbs from $60 slowly with inflation.

The change will wipe as much as $6bn from the upstream oil and gas producing units. Part of this will come from a decline to the discount rate used to calculate decommissioning liabilities, which will raise the present value of that figure (currently over $21bn). Almost half of total writedowns will fall on Shell’s integrated gas division, home to some of the group’s most capital intensive liquefied natural gas projects around the world. LNG pricing contracts are linked in part to oil prices.

Where Shell’s move to decarbonise its operations will appear is in its refining business for oil products, resulting in as much as $7bn of writedowns. A nearly one-third mark down in the refining margins outlook — the spread between crude and fuel prices — is a key cause for the adjustment.

Yet if Europe’s oil producers want to position themselves for their industry’s uncertain future they will need to start lowering longer term forecasts too. They might start with those of the International Energy Agency. It has a long-term oil price forecast of $64 per barrel, adjusted for 2020 dollars. A number of the largest oil producers use well over $70, notes Société Générale. Equinor of Norway uses $80. While it is true that the IEA’s forecasting abilities are hardly worth trumpeting, the disjointed message is notable.

Short-term oil demand destruction has already taken its toll on the balance sheets of producers such as Shell and BP. Most are preparing for the energy transition, but not all have fully reflected these changes in their own oil price outlooks. The writedowns will keep on coming.

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