‘Fundamental change’: How write downs and bankruptcies are fuelling stranded asset fears

Posted On Jul 10, 2020 By admin With Comments Off

'Fundamental change': How write downs and bankruptcies are fuelling stranded asset fears

Shell and BP are writing down assets while a raft of US fracking firms are entering bankruptcy protection- mutate is coming to the fossil fuel industry faster than anyone expected

The stranded asset hypothesis just got real.

In the past month, first BP and now this week Shell have announced plans for multi-billion pound write downs on some of their fossil fuel resources; the onetime poster child of the US fracking industry Chesapeake Energy has filed for bankruptcy armour; gains have been trimmed, job losses are on the way, and a raft of top exertion companionships have publicly announced plans to accelerate their clean power transition strategies.

Analysts who for much of the past decade have viewed admonishings that fossil fuel assets could become stranded as an provocative, yet basically premature philosophy have been rushing to raise the alarm over how many more major are writing about and likely insolvencies are in the pipeline. As Ernest Hemmingway famously complied with in his 1926 fiction The Sun Also Rises bankruptcies happen two ways: “Gradually, then suddenly”.

It might have taken an unprecedented pandemic to transport high oil prices plummeting, leaving oil majors with portfolios of existing and prospective projects where, in BP boss Bernard Looney’s commands, “we are spending much, much more than we make”. But there is a good reason why a growing number of fossil fuel beings are not simply battening down the hatches in preparation for a period of recession and sustained low prices, before firing up a new wave of projects. Price and necessitate estimations ought to have pruned and there is a real sense that the clean exertion transition that much of service industries has tip-toed around for the past decade could be about to accelerate.

Shell’s announcement that they are able to write down up to $22 bn of assets in the second quarter rendered headlines this week, but it is its new cost projections that will have investors and many of its peers worried.

The company trimmed promises for Brent crude prices in 2022 from $60 to $50 a barrel, while Henry Hub US gas price projection now stand at $2.50 per million British thermal groups, down from $3. As Colin Smith at Panmure Gordon told the FT, “these price decks are now sensible as they were too aggressive beforehand”, but the lower rate estimates elevate major questions. “Longer term, the world is not short of resources versus consumption that would be in line with the Paris climate objectives, ” Smith observed. “The disorders from BP and Shell together with the lower rate floors sharpen the question of where future increment and returns are going to come from as they bend in to the energy transition.”

However, the contention that the new cost juttings are more realistic is contestable. It is possible demand could recover strongly post-pandemic, but every business in the world is currently battling with unprecedented levels of uncertainty. It is feasible that a second brandish of the pandemic or years of disruption could lead to further downward price estimations in the future.

In a widely shared briefing note issued in response to Shell’s announcement, Luke Parker, vice president of corporate analysis at consultancy Wood Mackenzie, spelled out what is fast becoming the new orthodoxy. “The impairment Shell has announced is about more than an accounting detail, or an adjustment to near-term price acceptances, ” he argued. “It’s about fundamental change hitting the part oil and gas sector. Within this write-down, Shell is giving us a send about stranded assets, just like BP did a few weeks ago.”

That message from BP had been similarly clear. The company announced it was looking at write-downs and disability prices that are expected to total between $13 bn and $17.5 bn, when drawing up around 10,000 activities losses and accelerating its new cyberspace zero transition strategy.

For a growing number of investors alarm bells are resounding. In the wake of BP’s announcement influential think tank Carbon Tracker – which has been warning of stranded resource gambles for over a decade – welcomed moves across the industry to revise oil price and requirement projections downwards, but it forewarned that the petroleum majors’ presuppositions for future lubricant require still remain far higher than levels the think tank thinks would be in line with the goals of the Paris Agreement. The organisation concluded that no oil and gas conglomerates across Europe and the US are currently basing their resource valuations on reasonable premium beliefs for oil.

Moreover, a previous analysis from Carbon Tracker has shown that Shell and BP are amongst a handful of petroleum majors who have at least started to diversify their business model through investments in emerging clean engineerings and boast portfolios that, while far from immune the abandoned resource probabilities that come with low high oil prices, are more competitive than many of their peers in a low price environment. Some preceding oil conglomerates, in the US in particular, are inconvenienced with project portfolios that require sustained high oil prices to turn a profit. A consensus is structure that more are writing about are on the way – potentially a lot more.

Charles Ward, a professional trustee at Dalriada Trustees, the coming week offered a stark assessment of the risks investors now face. “Yet another petroleum major is writing down the best interests of the its resources, ” he said. “It’s a indicate there will be an accelerated move to a lower carbon economy, which calls into question the financial rationale for continuing to invest in fossil fuels. Research conservatively therefore seems that between$ 1tr and$ 4tr of value will be written down as a result of economies transitioning to lower carbon technologies. This is a trend that pension fund trustees cannot ignore.”

The trend was further hammered home by consultant house DNV GL, which the coming week met those is forecast that the slump caused by the coronavirus crisis intends lubricant involve has peaked, with 2019 tagging the high tide for world releases. The risk management consultancy had previously foresaw a pinnacle in demand from 2022, arguing that clean engineerings are reshaping the global energy busines. But the pandemic has accelerated its projected timeline for the clean vigor modulation and it is now predicting that global energy use would be eight per cent lower in 2050 than previously expected.

“Lasting behavioural changes to travel, commuting and running attires will too lessen vitality habit and lighten demand for fossil fuels from the transport sector as well as from iron and sword yield, ” the company said in a statement.

“While we expect oil demand to recover next year, we think that it’s likely that it will never contact the levels seen in 2019, ” Sverre Alvik, is chairman of DNV GL’s Energy Transition Outlook, told Reuters.

The company, like most other commentators, is still a long way from projecting a gait of emissions reductions that would be compatible with the Paris Agreement, but their consequences for the fossil fuel industry and its finances are still stark. And investors are starting to ask ever more timed questions. Ward’s advice to regents is because they “should be asking challenging the issues in their financing managers and how they are managing their exposure to stranded resource risk”. “As regents, we are responsible for over PS1tr of our members’ money and it is incumbent on all of us to look to the future and make sure we are proactively finagling our exposure to such a material threat, ” he added.

The response to such concerns from oil and gas majors have been broadly two-fold: some have argued they can manage transition perils and are responding responsibly by ramping up increasingly daring cyberspace zero modulation hopes; others have largely spurned such nervousness and continue to insist high fossil fuel demand can be sustained for decades to come, even as climate responses escalate.

It is this first clique that are really worth watching closely. BP, Shell, Total, and others have recently launched net zero approaches, while promising much more detailed emission reduction proposals are on the way. Critics maintain those majors that have made a commitment to net zero have a long way to go to bring their investment intentions into boundary with a net zero decarbonisation path, but while some fear ‘greenwash’ from an manufacture with a questionable track record it is clear that public and stated providing assistance to net zero is now there.

Moreover, business modelings are evolving. Just this week BP announced it has agreed to sell its global petrochemicals business to INEOS in a administer importance$ 5bn. Looney made clear the slew was of a piece with the company’s clean intensity change strategy. “This is another significant step as we steadily work to reinvent BP, ” he said. “Strategically, the overlap with the rest of BPis limited and it would make considerable asset for us to grow these customs. As we work to build a more focused, more integrated BP, we have other opportunities that are more aligned with our future tendency. Today’s agreement is another deliberate step in building a BP that can compete and attained through the vitality transition.”

In other specific areas of the energy quality bond same re-organisations are underway, as enterprises that were once almost entirely reliant on fossil fuels seek to position themselves for a clean vitality transition and minimise the risk of further write downs. This week alone Equinor has invested in carbon captivate consultant Carbon Clean Solutions, British Gas parent company Centrica has issued a clarion call for a national roll out of heat runs, and engineering giants Hitachi and ABB formally launched their new smart-alecky grid focused seam dare Hitachi ABB Power Grids.

Most notably, RWE’s high profile asset swap with E.ON – one of the most important agreements in German industrial record – was finally accomplished this week, generate a brand-new European renewables powerhouse. The last phase of the spate recognize RWE take over the E.ON’s renewables works, including its wind, solar, and hydropower enterprises as well as the biomass, biogas and gas storage activities and its stake in Austrian power utility Kelag, which boastings a major hydroelectric power business.

Rolf Martin Schmitz, CEO of RWE, was clear on the rationale behind the spate. “The brand-new RWE has been completed, ” he said. “It is a new, bigger and more diverse company, with a clear goal. By 2040, we will be carbon neutral. This will take us far beyond what other companies are aiming for.”

As Parker observed in his note on Shell’s write down, “demand might still originate from here, and many companies are still chasing a share of that growing. But originate no mistake, the corporate terrain is changing, and the majors are changing with it.”

And what of those that are resisting the pressure to change? The fib of Chesapeake Energy is informative, if not prescient. The fellowship that was synonymous with the US fracking thunder filed for Chapter 11 insolvency protection last Sunday.

It affiliates a tide of US shale gas and oil firms that have gate-crashed in recent weeks as the oil price has slumped far below their breakeven part. But the trend was already apparent before the coronavirus crisis hit, with debt-laden companionships struggling to turn a profit whenever oil and gas premiums dipped. Over 200 lubricant makes have reportedly filed for insolvency in the US in the past five years.

Chesapeake Energy is the largest fracking operator to date to fall foul of volatile market conditions. Having formerly boasted a market ceiling of $37 bn, the firm was valued at around $115 m at the close of trading on Friday. The firm is working on a restructuring intention and will continue to operate throughout the bankruptcy process. But that mean will see it chipped$ 7bn of its$ 9bn indebtednes ridge. It joins other US fossil fuel musicians, such as coal whales Peabody Energy and Murray Energy, in falling into bankruptcy protection. A lot of parties have lost a lot of money as the energy groceries have derived – and all the trends hint the clean vitality modulation has only just begun.

Those oil majors that have failed to fully engage with the clean-living energy change are a long way from calling in the administrators and it remains perfectly possible that a recovery from the coronavirus crisis could yet prompt a reincarnated fossil fuel boom. But investors and reporters are more apprehensive than ever before. The stranded asset presumption has exited from fascinating hypothesis to practical reality.

Moreover, there is an element of self-fulfilling prophecy at play here. The more force companionships rest in to the energy transition, the faster it get, limiting demand for fossil fuels still further, leading to yet more stranded assets, which then support exertion companies to speed up their transition designs, and so on. The coronavirus crisis has served to amplify still further a process that was already underway. Last-place month’s write downs are a likely indicate of things to come, and, crucially, everyone knows that.