BP Asset Write Down: First Shot Fired in Big Oil's Last Stand

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“Come gather ’round, people, Wherever you roam, And admit that the waters, Around you have grown” – The Times They Are a-Changin’, Bob Dylan

In the wake of the COVID-19 pandemic and the fall in demand for petroleum products the oil giant, BP Plc, has announced that it has cut its forecast for the average price of Brent Crude between now and 2050 from $70 to $55. It also mentioned in the unscheduled statement that it is going to write off between $13bn and $17.5bn of assets, as well as review whether it will develop potential oil fields [1, 2, 3].

This 30% price drop represents BP’s belief that the oil market will not recover quickly and that the oil price recovery will be muffled by the continued drive towards renewable technologies and a net-zero world. This is even more prescient as many governments around the world are mooting the idea of a climate-friendly renewables-focused green recovery.

This latest announcement comes hot on the heels of three further announcements by BP’s new CEO, Bernard Looney:

In February BP announced that it has set out to become net-zero by 2050 or sooner. An obvious (and probably justified) wave of scepticism followed [4] as the plan itself is not very specific [5].
At the same time they divulged plans for a new organisational restructure. Gas and low-carbon will form one division, as well as a host of smaller divisions tasked with developing new applications and technologies. The headline announcement, however, is that the previously separate upstream and downstream divisions (both of which could be FTSE 100 companies in their own right), will be merged into a single entity [6] – ready for a demerger?
And finally, earlier in June 2020 BP announced they were laying off 10,000 staff. In an email to staff Mr Looney said, “It was always part of the plan to make BP a leaner, faster-moving and lower carbon company” [7].

The times they are (definitely) a-changin’

OK, so BP has a different view of the future than they did in 2019 with the old CEO. Does that matter? And crucially, what effect does this have on the remaining oil majors – ExxonMobil, Chevron, Shell, Total – and the state oil companies – Saudi Aramco, Gazprom, National Iranian Oil Company et al? And for the oil that they still have in the ground?

Further marketing, rebranding, and potential greenwashing will not worry them greatly, neither will job cuts. BP have been here before with the ‘Beyond Petroleum’ campaign [8] and job cuts are part and parcel of the oil industry [9].

But a material review of the value of BP’s assets is a big announcement which will affect the entire industry. A 30% drop in the oil price is not limited to BP and for now we live in a globalised oil market. Hence, a 30% drop in one market will lead to a similar drop everywhere else.

Furthermore, BP’s judgement on this issue is seen by many in the industry to be world leading. Its Annual Energy Outlook report is used by many analysts in the industry and shapes long term forecasting.

First Shot Fired

The term ‘stranded asset’ has been bandied about for years [10], and if we are to be anywhere near the Paris Climate Agreement’s aim of limiting the global temperature rise to 1.5℃ above pre-industrial levels then a lot of oil will have to stay in the ground and become a stranded asset [11, 12].

Companies and nations will have oil in the ground that may never see the light of day or may be sold for a lot less than their economists and accountants forecast. Importantly, companies and countries will have also borrowed money on the capital markets, which they had planned to pay off with that same oil.

These companies will have probably already run models similar to BP’s forecast internally, and they will privately know how far up the creek they are. The important factor about BP’s announcement is that they have made it in the first place. They are the first oil major to recognise that they will not be making as much money as they were forecasting/hoping to.

Stick or Twist?

There are three things which can happen next:

The oil industry ignores BP’s announcement and carries on as normal.
They openly dismiss and discredit the figures.
They accept that the cat is out of the bag and respond in kind, publicly admitting that the reserves they hold will not create the revenue they expect.

If it is option three then there will be a lot of lost revenue. By way of a quick visualisation, BP, Shell, ExxonMobil, Chevron and Total have a combined revenue of over $1.25tn [13]. If you crudely apply a uniform 30% drop to this then you get $0.88tn combined revenue.

Even if the companies and countries themselves choose options 1 or 2, investors and analysts almost certainly will not.

Conclusion

Big oil owns a lot of oil that will probably have to stay in the ground, therefore reducing their future revenues. BP has been the first of the oil majors to admit this publicly. Will this cause a cascade of re-evaluation of other company’s oil assets by either the companies themselves or investors? Most probably. In making this announcement BP has seized the narrative and others will now have to respond. But how?

What we can be sure of is the cat is finally out of the bag and that “oil in the ground today, is unlikely to pay”.

References

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