Shell has revised its mid and long-term price and refining margin outlook reflecting the expected effects of the COVID-19 pandemic and related macroeconomic as well as energy market demand and supply fundamentals. This has resulted in the review of a significant portion of Shell’s Upstream, Integrated Gas and Refining tangible and intangible assets.

The Refining asset valuation updates reflect Shell’s strategy to reshape and focus its refining portfolio to support the decarbonisation of its energy product mix, leveraging assets and value chains in key markets.

The Upstream and Integrated Gas asset valuation updates, including of related exploration and evaluation assets, are largely driven by the change in long-term prices with some impacts due to a changed view on the development attractiveness.

A revision in the decommissioning and restoration provision discount rate assumption from 3% to 1.75%, reflecting a lower interest rate environment, has impacted the asset values tested for impairment.

As a result of these reviews, aggregate post-tax impairment charges in the range of $15 to $22 billion are expected in the second quarter.

Wood Mackenzie senior analyst Daniel Toleman said it’s no surprise to see Shell writing down the value of its assets, in line with the new post-pandemic energy demand outlook. In fact, we’ve revised the value of oil and gas assets in Asia Pacific by US$200 billion as a result of a lower oil price outlook.

“Shell’s write-down of QCLNG can be linked to the BG acquisition. A deal that is looking increasingly challenged by lower price assumptions. It is notable that Shell’s write-down included both QGC and Brazilian upstream assets.”

“Prelude, on the other hand, suffered from cost overruns and schedule delays. It is now offline and the leading backfill project, Crux, has been delayed. This, and likely also its high CO2 content, has led to a write-down.”

Angus Rodger, a director with Wood Mackenzie’s upstream research team, said the major oil companies are going through a process of reassessing long-term oil price assumptions and investment hurdle rates as a result of the oil price crash and the coronavirus.

“bp and Shell are just two of the companies that have announced recent changes. Cutting long-term price assumptions will generally result in a lower valuation, for certain assets to below the accounting value held on the balance sheet. That’s what will trigger an impairment charge.

‘’This process has further to run, and we expect further large impairments to occur across the sector.”

Rodger added that the price crash and pandemic has already wiped US$1.6 trillion off WoodMac’s valuation of the global upstream sector.

Luke Parker, vice president, corporate analysis at Wood Mackenzie, said: “The impairment Shell has announced is about more than an accounting technicality, or an adjustment to near-term price assumptions. It’s about fundamental change hitting the entire oil and gas sector.

“Within this write down, Shell is giving us a message about stranded assets, just like bp did a few weeks ago.”

Parker sees this as part of a wider trend.

“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,” he said.

“Demand might still grow from here, and many companies are still chasing a share of that growth. But make no mistake, the corporate landscape is changing, and the majors are changing with it.”

Mr Toleman said the write-down comes soon after BP carried out a similar exercise and reflects how the Energy Transition is impacting corporate strategy at the world’s largest oil and gas companies.

“The European super majors are setting out on a path towards more sustainable and resilient businesses, better equipped for a future of lower fossil fuel demand. This may be a signal that divestments could be on the cards, for some of Shell’s non-operated positions, adding to the recently announced Eni and Chevron packages that are expected to hit the market.”