BAKU, Azerbaijan, June 16
By Leman Zeynalova - Trend:
BP will need major re-balancing of investment decisions to meet climate ambitions, Will Scargill, Managing Oil & Gas Analyst at GlobalData, a leading data and analytics company, said, Trend reports.
“BP’s decision to revise downwards its long-term oil and gas price assumptions is an important step as it looks to remake itself for the energy transition. This will make the internal investment case for oil and gas investments more challenging and advance the case for clean energy investments,” said the analyst.
With its main oil and gas segments making up almost 98 percent of BP’s capital expenditure in 2019, a major re-balancing of investment decisions will be needed if it is to meet its climate ambitions, he said.
“These lower price assumptions also reflect the major uncertainty in the oil and gas industry around the future of the market after the turmoil wreaked by COVID-19. On top of the effects on oil and gas demand of lockdowns and lower economic growth, there are large questions around whether behavioural change may prevent transportation demand from returning to previous levels after the enforced experiences of working from home and virtual meetings,” noted Scargill.
Speaking after BP announced it was writing down as much as $17.5 billion when it reports its second quarter results, Luke Parker, vice president at Wood Mackenzie, said that the impairment shouldn’t come as a big surprise, but the implications – near-term and long-term – are significant.
“In the near-term, the impact of a US$17.5 billion write-down on shareholders equity would push BP’s gearing ratio to 45% (including lease liabilities, 41 percent excluding). A US$13 billion write-down would push these figures to 44 percent and 40 percent respectively. This is uncomfortably high.
“Greater urgency to pay down debt will put further pressure on the dividend. Of course, under BP’s latest price assumptions, cash generation will be less than previously anticipated.
“In the longer term, this is about BP’s strategic shift away from oil and gas. While that will be a multi-decade affair, BP is already getting to grips with the idea that its upstream assets are worth less than it believed as recently as six months ago. Indeed, some of them are worth nothing.
With the COVID-19 pandemic having continued during the second quarter of 2020, BP now sees the prospect of the pandemic having an enduring impact on the global economy, with
the potential for weaker demand for energy for a sustained period.
BP’s management also has a growing expectation that the aftermath of the pandemic will accelerate the pace of transition to a lower carbon economy and energy system, as countries seek to ‘build back better’ so that their economies will be more resilient in the future.
As a result of all the above, BP has revised its long-term price assumptions, lowering them and extending the period covered to 2050 so that it is now consistent with its ambition horizon. As part of its long-term strategic planning, and in the context of its continuing focus on capital discipline, BP is also reviewing its intent to develop some of its exploration intangible assets.
These actions will lead to non-cash impairment charges and write-offs in the second quarter, estimated to be in an aggregate range of $13 billion to $17.5 billion post-tax.
BP’s revised investment appraisal long-term price assumptions are now an average of around $55/bbl for Brent and $2.90 per mmBtu for Henry Hub gas ($2020 real), from 2021-2050. These lower long-term price assumptions are considered by bp to be broadly in line with a range of transition paths consistent with the Paris climate goals. However, they do not correspond to any specific Paris-consistent scenario.
As a result of the revision of long-term price assumptions used for investment appraisal, bp has also revised the price assumptions it uses in value in-use impairment testing and these are now aligned to bp’s revised investment appraisal price assumptions.
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