The future of most Nigeria’s indigenous oil companies may be under major threat as Shell, one of the world’s largest oil companies, has warned that it would write off up to $22 billion from the value of its assets after the spring’s oil price crash, a concession that in an age of abundant oil and gas some of its holdings won’t be profitable anytime soon.
In a trading update on Tuesday, the Anglo-Dutch firm said that impairment charges of up to $22 billion were expected in the second quarter, a development that shows what to expect from 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.
Shell’s decision follows that of its rival British Petroleum (BP), which told investors last week that its oil assets are not worth as much as they used to be and that it would write down the value of its assets by at least $17.5 billion.
The timing of IOCs’ impairment raises concern about existential threat for most indigenous Nigerian oil and gas producers.
Revaluation of assets as a result of the economic impact of coronavirus dragged Seplat Petroleum Development Company plc, Nigeria’s largest listed oil & gas firm by market value, into a loss of $106.6 million in its unaudited first quarter 2020 result.
Seplat’s Q1 2020 loss was mostly driven by a $145.5 million impairment loss charged on its oil and gas assets.
The current situation of Seplat is similar to other Nigeria’s indigenous oil companies which 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.
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.
For Nigeria’s domestic oil companies, an oil price within the range of $30-$40 may bring another round of funding crisis that might bring fears of 2016.
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.
It’s 2020 and the current oil price rout may mean a similar scenario is well on the cards for indigenous producers in Africa’s top oil producer.
For Shell, its reduction in the value of its assets will make its debts look that much bigger, and market-watchers are considering whether these changes are coming fast enough.
“The real question going forward is whether Shell’s fairly downbeat expectations are downbeat enough,” Nicholas Hyett, equity analyst at stockbroker Hargreaves Lansdown, tweeted on Tuesday.
“Oil prices have spent a large part of the last five years under $60 a barrel and while the collapse of several large US shale names might reduce global supply, the outlook for demand is hardly robust,” Hyett said.
Analysts at Royal Bank of Canada (RBC), a Canadian multinational financial services company and the largest bank in Canada by market capitalisation, 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. However, the bigger surprise is the lower refining margin assumptions over time.
“We do not expect this to materially alter Shell’s investment plans, the company has already sold multiple refineries in recent years, but we would expect this trend to continue,” analysts at RBC said.
Countries across the globe have ordered people to stay indoors and not travel as a result of the coronavirus pandemic, which has caused a slump in demand for oil.
As a result, the cost of oil fell to less than $20 a barrel at the peak of the crisis, less than a third of the $66 it cost at the start of the year.
For a brief period, buyers were actually paid to take delivery of crude oil amid a shortage of storage.
The price of Brent crude oil has recovered in recent weeks, and is currently trading at $41.04 per barrel.
Before Tuesday’s update, Shell had been banking on oil fetching $60 a barrel for the next three years. However, it has priced it down to $35 this year and $40 next year.
The change to the Anglo-Dutch giant’s outlook also comes amid a climate-focused review of its operations after chief executive Ben van Beurden said in April the company planned to reduce greenhouse gas emissions to net zero by 2050.
Shell said it would continue “to adapt to ensure the business remains resilient” as the industry seeks to shift its focus away from fossil fuels.
Over time, 0il companies such as Shell and BP are trying to reform themselves as energy firms, dabbling in greener energy and attempting to wean investors off the large dividends they traditionally pay.
On Monday, BP announced plans to sell its global petrochemicals business to billionaire Sir Jim Ratcliffe for $5 billon, achieving its divestment targets a year ahead of schedule.
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