Pandemic leads BP to warn of a future with less oil
BP sent a signal to investors this week that the economic shock of the pandemic would reverberate for years, and less gas and oil would probably be needed in the future.
The company told shareholders the company expects to write down as much as $17.5 billion of its oil and gas holdings in its next quarterly report.
The writedowns are an acknowledgment that the oil and gas fields on BP’s books are not worth as much as they used to be, and will likely stay that way for the foreseeable future. It reflects broad changes in the energy industry as companies are forced to adjust to a new environment.
“Everywhere I have been — inside BP, as well as outside — I have come away with one inescapable conclusion,” Bernard Looney, the chief executive, said in a speech in February. “We have got to change.”
Since then, the coronavirus pandemic has caused steep falls in demand and prices for oil and gas that could linger for a number of years. In addition, pressures from governments, consumers and investors are continuing to increase on oil companies, especially in Europe, to curb the greenhouse gas emissions produced by their fossil fuels.
With the writedown, which could amount to as much as 12% of the previous book value of the oil and gas assets, Looney, 49, is preparing the company for a future when it will produce less fossil fuel than previously expected. It is likely to be the largest writedown since 2010, when the company recorded a $32 billion hit related to the Deepwater Horizon disaster in the Gulf of Mexico.
In past years, companies rushed to acquire oil and gas fields and bring the crude or natural gas to market. Now, analysts say, investors are skeptical of all but the most profitable fossilfuel investments because it is not clear that there will be demand for them — especially as many governments strive to meet the requirements of the 2015 Paris Agreement on global warming.
“It is very clear that most energy companies are going to look very different in quite short order,” said Stuart Joyner, an analyst at Redburn, a market research firm. “The market will not pay for huge amounts of growth from these companies,” he added.
Looney, an Irish citizen who was head of BP’s oil and gas exploration and production unit before moving into the top role, has been focusing on these issues. Promptly after becoming chief executive in February, he pledged to bring the London giant’s carbon emissions to net zero by 2050 or sooner and embarked on a sweeping reorganization to aid this quest.
The darker economic environment caused by the coronavirus pandemic, he said in an email to employees on June 8, “is driving us to move faster — and perhaps go deeper at this stage than we originally intended.” The makeover is now expected to lead to the loss of 10,000 jobs, or nearly 15% of the workforce.
The writedowns are being taken for two reasons. BP has cut its longterm expectations of oil and gas prices by about 30%, to $55 a barrel for oil, a move that lessens the value of its assets. The company is also writing off resources in places like the Gulf of Mexico and Canada that it has on its books but may decide not to develop over the coming decades.