For years, Big Oil denied there was a problem with climate change and carried on drilling, deliberately creating doubt over the science. They could have acted decades ago, but they did not.
As our climate crisis intensified, the industry shifted its public relations strategy and started touting natural gas as a so-called “clean” bridge fuel, a stepping stone if you like, from dirty oil to renewables. There were major flaws in that argument, that gas is neither green nor clean, as OCI and others have repeatedly pointed out.
The other blatantly obvious flaw that climate activists pointed out was that the climate emergency was so urgent that we did not have time to carry on the fossil fuel age in any shape or form, whether oil or gas, and we should be investing in renewables now.
Another warning activists gave was that as the climate emergency worsened, and as the cost of renewables plummeted, that fossil fuels would become stranded, economically and ecologically unviable. Conventional wisdom was that the first fossil fuels to be stranded would be the costly, dirty reserves, like tar sands or deep offshore reserves.
The industry carried on drilling, ignoring the growing storm clouds on the horizon. But with COVID-19, the perfect storm has broken with a vengeance. With a plummeting oil price coupled with flatlining demand, and a realization that the old normal is not coming back, oil and gas companies are in trouble.
Two weeks ago, there was what I termed an “historic moment” when BP slashed up to USD 17.5 billion off the value of its assets after lowering its longer term price assumptions in the wake of COVID-19. In the words of the Financial Times, BP “expects” the pandemic “to hasten the shift away from fossil fuels.” BP’s assets were essentially stranded.
BP is no longer alone. Earlier this week, Shell followed suit, announcing it would slash up to USD 22 billion from the value of its assets.
Once again in the words of the Financial Times, “energy executives and analysts increasingly believe the pandemic will not only stall demand for oil and gas for a prolonged period but also accelerate the global shift towards cleaner fuels.”
Whereas BP’s write-offs were largely in dirty heavy oil and offshore, what will be sending shocks waves through the industry is that Shell’s write-downs are in gas.
As the FT stated: “Shell’s gas business, in which it has invested heavily following the $53bn acquisition of BG Group in 2016, will take the biggest impairment hit at $8bn to $9bn.”
In response, Wood Mackenzie analyst Luke Parker, said in a note reported by Axios, that “within this write down, Shell is giving us a message about stranded assets, just like BP did a few weeks ago.”
“Just a few years ago, few within the oil and gas industry would even countenance ideas of climate risk, peak demand, stranded assets, liquidation business models and so on. Today, companies are building strategies around these ideas,” said Parker.
Oil Change International’s Lorne Stockman also adds that Shell’s announcement “should not come as a surprise. Climate campaigners have been telling the industry that its assets are overvalued for years now. Shell is certainly no exception.”
Stockman continued: “It should not have taken a global pandemic for oil companies to realize that planning on rising demand for oil and gas forever was wishful thinking at best, and reckless disregard for human life at worst. This write down should be just the beginning.”
He also picked up on the gas write down angle: “It is also worth noting that over 40% of the impairment is attributed to Shell’s gas assets,” said Stockman. “Gas is not a bridge fuel, nor a safe investment. Shell has been a leader in peddling the gas myth for a decade or more, and it’s now clearer than ever that gas is over-supplied, over-hyped, and out of time.”
Stockman finished by saying: “Shell should now be planning for a future with not only lower oil and gas prices, but one in which oil and gas is phased out for good.”
One company that is out of time is Chesapeake Energy, once seen as the “poster child” of the U.S. fracking revolution, which was crippled by debt. As many people had predicted it filed for bankruptcy protection on Sunday, leaving initial debts of USD 7 billion.
There are indications that other companies could be heading for trouble too. Indeed, the Guardian noted on Monday, in the wake of Chesapeake’s collapse, “oil industry analysts said they expected more higher-cost and indebted shale companies to fold or be bought by competitors because of low oil and gas prices.”
Influential investor and commentator, Jim Cramer, said “what felled them was they had too much natural gas.” What was once their greatest asset had once again become their greatest liability.
The reality is that the so-called fuel of the future that the industry relied on to make money for the next few decades; gas, is now also heading for the history books. Meanwhile, investors are getting burnt badly and losing billions.
Between Shell and Chesapeake Energy, nearly USD 30 billion of assets have been written off as stranded. Just think how many solar panels or wind turbines that would have bought.