2020 was one of the worst years for oil write-offs

Companies in major Western economies are shedding their assets more during the coronavirus pandemic than in years. But the oil industry registered more than any other important segment of the economy, after an unprecedented collapse in global energy demand, according to a data analysis by S&P Global Market Intelligence.

Oil producers often drop assets when commodity prices fall, as cash flows from oil and gas properties decline. The reevaluation of the industry this year is among the most rigid of all time, because oil companies also face long-term uncertainties about the future demand for their main products amid the increase in electric cars, the proliferation of renewable energy 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 among the most aggressive cutters, accounting for more than a third of the industry’s write-offs this year. U.S. shale producers, including Concho Resources Inc.

and Occidental Petroleum Corp.

registered more deficiencies than in the last four years combined. The data, which covered the first three quarters of 2020, excluded Exxon Mobil Body

recently announced the plan to amortize up to $ 20 billion in the fourth quarter and Chevron’s $ 10 billion Corp.

reduced at the end of 2019.

The Journal’s analysis reviewed data from S&P Global Market Intelligence, Evaluate Energy Ltd. and IHS Markit on losses assumed by major oil companies and independent oil producers with a market value of more than $ 1 billion based in the USA, Canada and Europe.

Regina Mayor, who leads KPMG’s energy practice, said the write-offs represent not only a reduction in the short-term value of assets, but the belief of many companies that oil prices may never fully recover.

“They are facing the fact that demand for the product will decrease, and the write-offs are a harbinger of that,” said Mayor.

United States accounting rules require companies to write off an asset when their projected cash flows fall below their current book value. Although a reduction in recoverable value does not affect a company’s actual cash flow, it can potentially increase its borrowing costs by increasing its debt burden in relation to its assets. Companies are also required to record losses as a gain charge.

For the oil industry, the reassessment comes at the end of an era in which a perceived scarcity of energy supplies has led to a race to buy fossil fuel reserves, including U.S. shale deposits and Canadian oil sands. Some of the assets they acquired demand higher oil prices that prevailed at the beginning of the decade to be profitable. But after U.S. frackers released large sums of oil and gas, there were two oil seizures in the past five years and Brent oil, the global benchmark, last hit $ 100 a barrel in 2014.

Concerns about long-term demand are exacerbating the excess supply of fossil fuels, and companies say they have become more selective about where to invest. The projects are facing much tougher competition for capital amid wide offerings. BP, Shell and Chevron cited domestic forecasts for lower commodity prices as the cause of the losses.

BP believes that the coronavirus pandemic could have a lasting impact on the economy, Chief Executive Bernard Looney said in June, when the company announced reductions in value. “We have redefined our price forecast to reflect this impact and the likelihood of further efforts to ‘rebuild better’ towards a world consistent with Paris,” said Looney, referring to the carbon emissions targets of the Paris climate agreements.

Exxon said in November that it was strategically assessing the profitability of its assets under current market restrictions and that it would reduce the value of some assets by $ 17 billion to $ 20 billion.

The types of assets companies are writing off range from shale gas properties in the United States to offshore mega projects and intangible assets.

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

Last week, Shell signaled another reduction in value between $ 3.5 billion and $ 4.5 billion, in part against its Appomattox deepwater oil and gas project in the Gulf of Mexico.

In the coming years, increased competition from renewable energy and changes in fossil fuel policies may trigger further analyzes of the ability of oil and gas assets to generate future cash flows under US accounting rules, said Philip Keejae Hong, professor of accounting at Central Michigan University. Rapidly growing renewable energy, he said, could hurt the sector’s asset values ​​over time.

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

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