OIL AND gas firms, which report second-quarter earnings in the coming weeks, are cutting investment and trying to sell billions of dollars’ worth of resources. Even before covid-19 lockdowns hit energy demand and oil firms’ profits, investors were wary of big projects. Now the risk of costly stranded assets has grown more obvious. Last month BP and Royal Dutch Shell, an Anglo-Dutch rival, said they would take write-downs of up to $17.5bn and $22bn, respectively, on assets. As we report this week, the oil majors are ever keener to own only the cheapest, cleanest reserves.
Today Brent crude, a global benchmark, fetches just over $40 a barrel, making about half the world’s oil reserves too costly to produce. The impairments announced by BP and Shell last month accompanied revisions to their forecasts for the price of Brent. Shell now expects a barrel to cost $40 in 2021 and $50 in 2022, down from the $60 it assumed in its most recent annual report. BP forecasts that Brent will average $55 from 2021 until 2050. Just a few months ago its central assumption for prices over the next 20 years was $70.
The supermajors have worked to cut costs. Last year the average oil price needed to cover capital spending and dividends for the five biggest—ExxonMobil, Shell, Total, Chevron and BP—was less than half what it was in 2013, according to Goldman Sachs (see chart). The pandemic hit to demand has prompted further cuts to capital budgets. For some giants this coincides with a slow shift to cleaner energy.
As they seek cleaner and cheaper projects, many companies are struggling to offload mediocre ones. BP is the sole supermajor to meet its divestment target, of $15bn—in part thanks to the decision in June to sell its petrochemicals unit, a business that rivals view as having brighter prospects than drilling. In the past finding a buyer for an oil- or gasfield was not that difficult. Greig Aitken of Wood Mackenzie, an energy consultancy, recalls “a widespread view that prices would get up to $80 or $100” after the price crash of 2014. Even before covid-19, however, buyers were turning more cautious.
In China a crackdown on corruption has made state-owned oil companies less acquisitive amid closer scrutiny of foreign deals. Private-equity firms no longer have an easy exit strategy for energy investments because uncertain regulation and demand make it hard to envision a successful listing or sale to an oil major in a few years’ time. As a result, willing buyers are getting ever harder to find, although some acquirers will emerge for the same reasons others stay away: the transition to cleaner energy is uncertain and markets will remain volatile for a while.
Editor’s note (July 20th 2020): A longer version of this article appeared in the Business section of the print edition, under the heading “The bottom of the barrel”.