Shell to write off up to $22 billion after cutting post-pandemic oil, gas price outlook

London — Shell said it plans to write down the value of its assets by up to $22 billion after slashing its near-term oil and gas price assumptions to reflect a weaker, post-pandemic energy market outlook.

In a statement, Shell said it now assumes Brent crude prices will average $35/b in 2020, rising to $40/b in 2021 and $50/b in 2022, all down from $60/b under previous assumptions given at year-end 2019.

From 2023 onwards, Shell said it assumes Brent prices of $60/b, unchanged from previous guidance.

The outlook for Henry Hub gas prices was cut to $1.75/MMBtu in 2020, $2.5/MMBtu in 2021 and 2022, and $2.75/MMBtu in 2023. Longer term, Shell sees gas prices averaging $3/MMBtu. Shell's previous outlook was for Henry Hub prices of $2.75/MMBtu in 2020 and 2021, rising to $3/MMBtu in 2022.

Shell also cut its long-term refining margin assumptions by around 30% from a previous mid-cycle outlook.

As a result of the changes, Shell said it plans to take a post-tax impairment of between $15 billion and $22 billion in the second quarter.

"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," the company said in a statement.

Shrinking price decks

Europe's biggest oil company has already announced its first dividend cut since World War II and cut its capital spending by 20% this year in response to the collapse in oil prices and the economic impact of the coronavirus pandemic.

The move also comes two weeks after rival BP said it would write off up to $17.5 billion worth of assets after cutting its long-term price assumptions for oil and gas to reflect expectations that the coronavirus pandemic will accelerate the shift away from fossil fuel.

BP's new price assumptions for investment planning are now $55/b for Brent and $2.90/MMBtu for Henry Hub gas on a 2020 real basis, down from a previous outlook of $70/b and $4.30/MMBtu on a 2015 real basis.

BP's long-term oil price assumptions are now among the most conservative of its European oil major peers, most of which have also been trimming their price decks to factor in the energy transition and Paris Agreement climate goals. According to a study by Carbon Tracker, Italy's Eni and Norway's Equinor have significantly higher long-term oil price assumptions at $70/b and $80/b, respectively.

Q2 production, margins

Updating a previous Q2 2020 performance outlook provided on April 30, Shell said it now expects to report higher than expected oil and gas production for the period.

Europe's biggest oil company said production from its main upstream division is expected to be between 2.3 million-2.4 million b/d of oil equivalent in Q2, up from a previous estimate of 1.75 million-2.25 million boe/d, but down from 2.71 million boe/d in the first quarter of the year.

"Although this production range is higher compared with the outlook previously provided, it has had a limited impact on earnings in the current macro environment," Shell said.

In addition, LNG-focused gas production is expected to be 880,000-910,000 boe/d, up from a previous forecast of 840,000-890,000 boe/d, and down from 955,000 boe/d in Q1, Shell said. LNG liquefaction volumes are expected to total between 8.1 million mt and 8.5 million mt, up from the previous guidance of 7.4 million mt and 8.2 million mt, and down from 8.88 million mt in Q1.

Downstream, Shell said its refinery utilization is expected to be between 67% and 71% in Q2, with gross refining margins "significantly lower" compared with Q1, albeit be offset by higher trading and optimization results.

Oil product sales volumes are expected to be 3.5 million-4.5 million b/d, driven down by a major drop in demand related to the impact of COVID-19.