Corona crisis forces Shell to make large write-offs


As a result of the low oil and gas prices, Shell will make significant write-downs. In the second quarter, the group depreciates USD 15 to 22 billion (EUR 13.3 to 19.6 billion) of the value of its assets. Demand for oil and gas has fallen sharply due to the global corona crisis.

Write-offs announced on Tuesday do not lead to actual costs, it is an accounting operation. In a month, Shell will publish its second quarter results. The group is not the only company facing the difficult market conditions. Earlier this month, competitor BP decided to write down its assets, such as oil and gas supplies. Bee the British group that write-down increases to a maximum of $ 17.5 billion.

“Shell write-offs are not really a surprise,” said analyst Jos Versteeg of InsingerGilissen bank. “It also now makes clear why Shell cut its first-quarter dividend so sharply. That dividend was reduced by two thirds after the first quarter, which was more than expected. They’ve really got darker. ”

Depreciation on gas

The largest write-offs – $ 8 to $ 9 billion – are in the gas division. Gas prices are very low, especially in the United States. More than five years ago, Shell acquired gas producer BG for $ 70 billion. According to Versteeg, this was an important strategic acquisition. “But if they now have to write off so much on the gas activities, you can conclude that they paid too much for BG at the time.”

Shell will write off USD 4 to 6 billion around the production of oil. The company also expects a relatively low oil price in the coming years. For this year, Shell expects an average of $ 35 a barrel, next year $ 40 and from 2023 $ 60. This concerns European Brent oil, which now costs a little more than $ 40.

The refining of oil cannot escape the malaise either

The value of assets in Brazil and the US in particular is impaired. The production of American shale oil had previously been written off. Due to the high costs, extraction of shale oil is only profitable from $ 50 a barrel. Currently, the price of a barrel of American oil (WTI, West Texas Intermediate) is around $ 40, after a hefty dive earlier this year.

The refining of oil cannot escape the malaise either. In the second quarter, Shell will write off 3 to 7 billion “across the portfolio” without further specification. “Normally, companies like Shell and BP can count on a higher return on refining at low oil prices,” says Versteeg. In the refinery, crude oil is processed into, among other things, petrol and kerosene. “Due to the corona crisis, demand is so much lower that that market has also collapsed.” In April, for example, there was a halving of road traffic in the Netherlands.

Lasting effect

BP expects the pandemic to have a lasting effect on the demand for oil and gas. The current health crisis, the company wrote recently, will “accelerate the transition to a low-carbon economy and low-carbon energy system”. Shell is less concrete, but calls the current downward revaluation in one breath with its strategy of ‘decarbonising the combination of energy products’.

With an expected long-term oil price of $ 60 a barrel, Shell is slightly more optimistic than BP, which foresees a level of $ 55. “What will work to the disadvantage of these companies anyway is that governments will set sustainability requirements in exchange for support,” says Versteeg. “Certainly in Europe, electric cars and renewable energy will be stimulated even more.”

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