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
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.