Shell takes $22bn hit as sun sets on big oil

En­ergy ti­tan’s write-off raises the spec­tre of many thou­sands of job cuts to come in wake of pan­demic

The Daily Telegraph - Business - - Front Page - By Ed Clowes and Si­mon Foy

SHELL has writ­ten off up to $22bn (£18bn) af­ter warn­ing that the coro­n­avirus oil crash has trig­gered a longterm price slump – spark­ing spec­u­la­tion that the sun may be set­ting on a golden age for fos­sil fuel firms. The en­ergy ti­tan said yes­ter­day that it would take an ac­count­ing hit of between $15bn and $22bn in its sec­ondquar­ter re­sults as the pan­demic ham­mers all di­vi­sions of its busi­ness.

It raises the spec­tre of many thou­sands of job cuts in ad­di­tion to a vol­un­tary re­dun­dancy scheme which launched in May. An­a­lysts said the bumper blow is a sign that the oil and gas mar­ket is chang­ing per­ma­nently.

A Covid-19 col­lapse in de­mand has forced prices far be­low the lev­els needed for most North Sea firms to turn a profit, and is speed­ing up a wider push into re­new­able en­ergy which threat­ens the ex­is­tence of pre­vi­ously rock-solid busi­nesses.

In­ter­na­tional oil bench­mark Brent crude has col­lapsed by more than a third to un­der $42 this year, trig­gered by a world­wide eco­nomic shut­down that forced fac­to­ries to close and kept mil­lions of driv­ers in­doors. Shell does not ex­pect prices to re­turn to $60 a bar­rel un­til 2023.

Luke Parker, of con­sul­tant Wood Macken­zie, said: “The im­pair­ment Shell has an­nounced is about more than an ac­count­ing tech­ni­cal­ity, or an ad­just­ment to near-term price as­sump­tions. It’s about fun­da­men­tal change hit­ting the en­tire oil and gas sec­tor.”

The an­nounce­ment brings Shell’s fore­casts for the in­dus­try in line with a sim­i­larly bleak out­look from ri­val BP. Last month, BP an­nounced that it would write down the value of its as­sets by between $13bn and $17.5bn.

Shell ex­pects fuel sales to have slumped 40pc in the three months to the end of June.

The change to the An­glo-Dutch be­he­moth’s out­look comes amid a re­view of its op­er­a­tions af­ter Ben van Beur­den,

the chief ex­ec­u­tive, in April an­nounced plans to cut green­house gas emis­sions to net zero by 2050.

On Mon­day, BP an­nounced plans to sell its global petro­chem­i­cals busi­ness to bil­lion­aire Sir Jim Rat­cliffe for $5bn – achiev­ing its di­vest­ment tar­gets a year ahead of sched­ule.

An­a­lysts at RBC said: “The lower near-term price deck for oil and gas is not a huge sur­prise given Shell’s ini­tial com­ments post Covid-19 and cur­rent spot prices.”

In April, the com­pany slashed its div­i­dend for the first time since the

Sec­ond World War fol­low­ing the col­lapse in the oil price.

Shares fell nearly 4pc in Lon­don af­ter the write-down was un­veiled.

Mr Parker said: “Just a few years ago, few within the oil and gas in­dus­try would even coun­te­nance ideas of cli­mate risk, peak de­mand, stranded as­sets, liq­ui­da­tion busi­ness mod­els and so on.

“To­day, com­pa­nies are build­ing strate­gies around these ideas.”

From net zero to ground zero. Af­ter all Shell’s bold but frankly easy talk about at­tain­ing car­bon-neu­tral sta­tus, boss Ben van Beur­den has fi­nally de­liv­ered some real num­bers to back it all up. Mir­ror­ing a move by BP, Shell has taken a gi­ant red pen to the value of its oil, gas, and re­fin­ing as­sets with a write­down of up to $22bn (£17.7bn). It is $5bn big­ger than the im­pair­ment charge that BP took a fort­night ago, and if Shell had used the pre-tax fig­ure, rather than the post-tax one, the num­ber would be as high as $27bn.

The num­bers are across the board too: $9bn off its gas arm, mainly in Aus­tralia; and a $7bn hit to its re­finer­ies. There is also a $6bn im­pair­ment up­stream, largely in Brazil and in its North Amer­ica shale fields, an ad­mis­sion of sorts that those projects may never see the light of day, even if Shell stopped short of say­ing it would re­view some of its ex­plo­ration plans like BP.

Still, it is an in­di­ca­tion of where Shell, and the rest of the oil in­dus­try is head­ing, though if the ma­jors are gen­uinely se­ri­ous about hit­ting their net zero tar­gets then this is just a taster of what’s to come.

Tens of bil­lions of dol­lars worth of in­vest­ment will even­tu­ally be ren­dered worth­less as the world races to meet the Paris cli­mate goals.

Yet, this is only an ac­count­ing trick so the party pop­pers can be saved for a later date, and it is a move brought about by ex­ter­nal fac­tors well out­side of Shell’s con­trol.

Covid-19 has dra­mat­i­cally changed the pic­ture. Lock­down has dec­i­mated de­mand, pos­si­bly per­ma­nently, if gov­ern­ments de­cide this is the mo­ment to ac­cel­er­ate the green agenda.

That has forced Shell and oth­ers to tear up long-term fore­casts for prices. Brent crude prices for 2022 have been cut from $60 a bar­rel to $50, a size­able ad­just­ment though not as chunky as BP’s which came down from $75 to $55.

It is also plan­ning for a 17pc fall in nat­u­ral gas prices from $3 per mil­lion Bri­tish ther­mal units, to $2.50, a 30pc slump in re­fin­ing mar­gins, and a 40pc fall in fuel sales in the sec­ond quar­ter.

As van Beur­den said in April, the pan­demic has left Shell walk­ing a tightrope between short-term fi­nan­cial needs and longterm am­bi­tions.

The div­i­dend has been cut for the first time in 80 years, share buy­backs paused, cap­i­tal ex­pen­di­ture and op­er­at­ing costs slashed, and bor­row­ings ramped up.

It has also pro­vided cover for the com­pany to step up its net zero push. It has al­ready warned of job losses, just weeks af­ter BP an­nounced 10,000 re­dun­dan­cies.

But the true mea­sure of Shell’s repo­si­tion­ing is not the re­duc­tion in spend­ing on drilling for new oil and gas but the sums it sets aside for re­new­able en­ergy in­vest­ment.

Van Beur­den’s frus­tra­tion is that one half of Shell’s share­holder base is al­ways urg­ing him to up spend­ing, while the other half wants the com­pany to stick to its knit­ting. Per­haps this is the point where the first crowd starts to win the ar­gu­ment.

At the mo­ment, that fig­ure is $3bn from a to­tal cap­i­tal spend­ing plan of around $20bn a year. When it be­comes more mean­ing­ful, then Shell’s com­mit­ments to de­car­bon­i­sa­tion will be taken more se­ri­ously.

‘Pan­demic has left Shell walk­ing a tightrope as lock­down dec­i­mates de­mand’

Fash­ion’s wake-up call

It has been de­scribed as “Le­ices­ter’s dirty lit­tle se­cret” – thou­sands of un­der­paid, over­worked gar­ment work­ers toil­ing in ap­palling con­di­tions, in the city’s fac­to­ries.

It can’t be that hard then to draw a line between the labour abuses that are tak­ing place in the tex­tile in­dus­try and the spike in Covid-19 in­fec­tions that has forced Le­ices­ter back into lock­down.

The sci­ence has proven that the virus is spread more eas­ily in the sort of poorly ven­ti­lated, cramped con­di­tions that an es­ti­mated 10,000 lo­cal peo­ple are forced to work in every day for way be­low min­i­mum wage.

Nor then is it un­fair to ex­tend that line to the fast fash­ion in­dus­try, which is thriv­ing on the back of such fac­to­ries. Though the re­spon­si­bil­ity ul­ti­mately lies with the em­ploy­ers, it is cheap labour that en­ables sup­pli­ers to charge low rates and the re­tail­ers to sell clothes at bar­gain prices.

In­deed in an at­tempt to de­fend their prac­tices, some of the cloth­ing man­u­fac­tur­ers com­plain that they are un­der huge pres­sure from the big re­tail chains to keep prices down, which makes it im­pos­si­ble to pay a fair wage.

Pre­sum­ably the same ar­gu­ment can be made for op­er­at­ing un­der con­di­tions that wouldn’t look out of place in a Dick­ens novel.

It is some­thing that the Gov­ern­ment has known about for years but failed to do any­thing about. In 2019, MPs on the en­vi­ron­men­tal au­dit com­mit­tee pub­lished a re­port called Fix­ing

Fash­ion that made a se­ries of rec­om­men­da­tions about how to make the in­dus­try safer for the work­force but min­is­ters re­fused to im­ple­ment any of them. The Le­ices­ter lock­down is a wake-up call.

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.