British energy giant BP has announced its intention to write down the value of its assets by as much as £14 billion ($17.5 billion) following a review into its longer-term energy energy price assumptions. The company has reached the conclusion there will be a faster transition away from fossil fuels than asset valuations have been based on.
BP’s analysis reached the conclusion that the Covid-19 pandemic lockdowns around the world will have a significant and lasting impact on the global economy. One repercussion of the post-coronavirus economic slowdown will be, BP now believes, an acceleration of the shift towards cleaner forms of energy.
BP has revised its long-term oil price forecasts by around 30% and now expects Brent crude oil to sell for an average price of $55 a barrel between 2021 and 2050. A million British thermal units of Henry Hub has is expected to sell for an average of $2.90 over the same period.
BP’s revised market assumptions will have a knock-on effect on some exploration plans as well as leading to the downward revision of the value of existing assets the company holds. Some oil fields may be commercially viable for less time than previously expected, with oil and gas that is more expensive to extract left in the ground at prices averaging out at less than previously expected.
BP offered second quarter forward guidance that it expects its review of asset values to see non-cash, post-tax impairment charges and exploration write-offs to come in at between $13 billion (£10.4 billion) and $17.5 billion (£14 billion).
BP is the first oil major to come out and publicly state that it will write down asset values to reflect a new reality. Investors Sarasin & Partners are quoted in the Financial Times as saying the believe oil majors have been overly optimistic on their long-term energy price forecasts and that this has led them to overstate capital, earnings and future ability to pay out dividends.
BP CEO Bernard Looney who took over the role from predecessor Bob Dudley in February of this year has been keen to impress that he sees his mission as steering the company towards a low carbon future. He has already set the ambitious target of carbon-neutrality for BP by 2050 and appears keen to seize the opportunity presented by the current oil price crisis to drive through faster change in the company’s strategic direction.
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