Stranded assets: oil be off
Expect more soul-searching and more asset impairments in 2021
Not even Greta Thunberg, Gen Z’s most notable climate change activist, could have expected the reappraisal of oil to have come about as quickly as it did this year. The possibility of stranded assets in the oil and gas industry has been discussed for years. But a pandemic-induced economic shutdown forced an implicit acceptance of the idea by hydrocarbon producers. At a minimum, every oil company had to reassess the economic viability of their portfolio after oil prices fell as much as 70 per cent in the first months of the crisis.
Stranded assets are defined by the International Energy Agency as “investments which have already been made but which, at some time prior to the end of their economic life, are no longer able to earn an economic return”. In 2020 the largest oil producers had to ask hard questions about the viability of projects. In February, Lex estimated that as much as $900bn of their market value could be at risk for the 13 largest oil producers.
Some producers, such as BP, France’s Total, and Italy’s Eni made brave strategy calls on the future of their businesses and set clear targets for carbon emissions. Including Royal Dutch Shell, which announced more writedowns on Monday, these companies announced more than $55bn in impairments this year.
Not all will see the charges as acceptance that hydrocarbon assets are stranded. Some will view them merely as near-term accounting adjustments. Oil consumption has collapsed this year and may take some time to recover. Global oil demand dropped more than 16 per cent year on year by June 2020 to 83m barrels a day, according to the IEA. But ExxonMobil thinks the decline in prices is temporary. It still believes oil and gas have more to offer.
Yet even if the world’s energy companies are simply accounting for macroeconomic realities, the fact is that 2020 was just another in a series of bad years for the energy sector. Even after a doubling of oil prices since late April, the largest 13 oil groups have lost $326bn of their collective enterprise value this year. Expect more soul-searching and more asset impairments in 2021.