2020 was one of the worst years for oil spills

Companies in major Western economies are writing more of their assets during the coronavirus pandemic than they have in years. But the oil industry has scored more than any other major segment of the economy, following an unprecedented collapse in global energy demand, according to an analysis by S&P Global Market Intelligence.

Oil producers frequently record assets when commodity prices fall as cash flows from oil and gas properties decline. The revaluation of the industry this year is one of the strongest in history, as oil companies also face long-term uncertainty about future demand for their main products amid rising electric cars , the proliferation of renewable energies and the growing concern about the lasting impact of climate change.

Major European oil companies Royal Dutch Shell RDS.A -0.31%

PLC, BP ​​BP -0.71%

PLC and Total SE were one of the most aggressive cutters, accounting for more than a third of the industry’s declines this year. American shale producers, including Concho Resources Inc.

and Western Petroleum Corp.

recorded more deteriorations than they had had in the last four years combined. The data, which covered the first three quarters of 2020, excluded Exxon Mobil Corp.

recently announced plans to score up to $ 20 billion in the fourth quarter and the $ 10 billion Chevron Corp.

reduced at the end of 2019.

The newspaper’s analysis reviewed data from S&P Global Market Intelligence, Evaluate Energy Ltd. and IHS Markit on Impairments of Major Oil Companies and Independent Oil Producers with a market value of more than $ 1 billion based in the United States, Canada and Europe.

Regina Mayor, who heads KPMG’s energy practice, said the declines represent not only a decline in the short-term value of assets, but the belief of many companies that oil prices will never fully recover.

“They’re understanding the fact that demand for the product will decrease, and the drops are a harbinger of that,” Ms. Major.

U.S. accounting standards require companies to record an asset when their projected cash flows fall below their current carrying amount. While an impairment does not affect a company’s actual cash flow, it can increase borrowing costs by increasing its debt load relative to its assets. Companies are also required to record impairments as profit charges.

For the oil industry, the revaluation comes at the end of a time when the perceived shortage of energy supplies spurred the purchase of fossil fuel reserves, including U.S. shale deposits and sands. Canadian oils. Some of the assets they acquired require higher oil prices that prevailed at the beginning of the decade to be profitable. But after U.S. frackers unleashed large sums of oil and gas, there have been two busts of oil in the past five years and Brent oil, the world benchmark, topped $ 100 a barrel in 2014.

Concerns about long-term demand exacerbate the excessive supply of fossil fuels, and companies say they have become more selective about where they invest. Projects face much tougher competition in terms of capital amid supply. BP, Shell and Chevron cited domestic commodity price forecasts as the cause of the deterioration.

BP believes the coronavirus pandemic could have a lasting impact on the economy, chief executive Bernard Looney said in June when the company announced the cuts. “We have re-established our price prospects to reflect this impact and the likelihood of further efforts to‘ better rebuild ’towards a world consistent with Paris,” Looney said, referring to the carbon emissions targets of the Paris climate agreements. .

Exxon said in November that it had been strategically assessing the return on its assets under current market constraints and that it would reduce the value of some assets by a total of $ 17 billion to $ 20 billion.

The types of assets that companies write range from U.S. shale gas properties to mega-offshore projects and intangible assets.

Shell said its declines were mainly related to the Queensland Curtis liquefied natural gas project in Australia and its giant floating gas facility, Prelude, which has struggled to raise revenue after years of delays and overruns costs. The pandemic has triggered a restructuring of the company, in part to refocus on the higher value oil it produces, while accelerating low-carbon energy investments.

Last week, Shell reported another $ 3.5 billion to $ 4.5 billion impairment, in part against its Appomattox deepwater oil and gas project in the Gulf of Mexico.

In the coming years, intensive competition from renewables and policy changes toward fossil fuels could lead to further revisions to the capacity of oil and gas assets to generate future cash flows under U.S. accounting standards, he said. Philip Keejae Hong, professor of accounting at Central Michigan University. He said fast-growing renewables could wipe out industry asset values ​​over time.

“It’s not like a company [is] making a bad move, “Mr Hong said.” It’s a threat facing the industry as a whole in the long run. “

Write to Collin Eaton at [email protected] and Sarah McFarlane at [email protected]