The coronavirus pandemic and an uncertain, volatile oil market have forced the world’s biggest oil companies to write down their asset value by $145 billion, the most in a decade, raising questions about long-term recovery of prices and setting off existential crises for local operators.
Both indigenous and international oil companies frequently write down assets when commodity prices crash and cash flow from oil-and-gas properties diminishes. However, the scale of this write-down could significantly reduce taxes to national economies.
The decision to write down a combined $145 billion assets in the first nine months of 2020 alone, the highest since at least 2010, signals that recovery will be slow, a development that will pose serious challenges to local operators.
Oil majors like Royal Dutch Shell, British Petroleum, and Total SE were among the most aggressive cutters, accounting for more than one-third of the industry’s write-downs this year, while US shale producers, including Concho Resources Inc. and Occidental Petroleum Corp., booked more impairments than they had in the past four years combined.
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Since the end of September, more write-downs have been announced, which may take the total 2020 tally well beyond $150 billion. For instance, Exxon said in November it had been strategically evaluating its assets’ profitability under current market constraints and would slash the value of some assets by at most $20 billion, while Shell also issued another latest warning of up to $4.5 billion write-down within the same period.
According to a Wall Street Journal analysis, 2020 write-down significantly surpassed previous write-downs taken over the same periods in 2015 and 2016, during the last oil bust, and is equivalent to roughly 10 percent of the companies’ collective market value.
For most experts, this year’s industry-wide reappraisal is among its starkest ever because oil companies also face longer-term uncertainty over future demand for their main products amid the rise of electric cars, the proliferation of renewable energy and growing concern about the lasting impact of climate change.
“The oil industry has written down more than any other major segment of the economy, following an unprecedented collapse in global energy demand,” according to analysis of data from S&P Global Market Intelligence.
The timing of these IOC impairments poses an existential threat for most indigenous Nigerian oil and gas producers. For firms like Aiteo E & P Ltd, Seplat Petroleum Development Company, and at least 50 small to mid-sized Nigerian producers pumping between 1,000 and 100,000 barrels each day, analysts say they would feel the squeeze.
Asset revaluation due to the economic impact of COVID-19 dragged Seplat Petroleum Development Company Plc, Nigeria’s largest listed oil and gas firm by market value, into a loss of $106.6 million in its unaudited first quarter 2020 result. This was mostly driven by a $145.5 million impairment loss charged on its oil and gas assets.
“Impairment of assets is not necessarily a bad move by any company,” Niyi Awodeyi, CEO at Subterra Energy Resources Limited, said. “It’s a threat that the industry as a whole is facing in the long run.”
The current situation of Seplat is similar to other Nigeria’s indigenous oil companies who do not possess the same capacity and leverage as their foreign counterparts in accessing global finance. It is even worse now when virtually every country in the world is concentrating on saving its people and economy.
The majority of them have costs of production in the $30-$40 per barrel range, largely as a result of the high costs of operation and security-related expenses in the onshore shallow-water fields of the Niger Delta, where militant attacks on oil and other energy infrastructure are rampant.
Charles Akinbobola, an analyst at Lagos-based Sofidam Capital, said heightened competition from renewable energy in coming years and policy changes toward fossil fuels could trigger further reviews of oil-and-gas assets’ ability to generate future cash flows.
Fast-growing renewable energy, he said, could chip away at the industry’s asset values over time.
In 2016, the indigenous firms that bought the assets could no longer generate revenue at the levels expected when they agreed to loan terms, putting themselves and banks at risk.
