COVID-19 is Fueling Divestment in Oil and Gas

The COVID-related oil crisis and the aftermath of the pandemic has led to a heightened risk of bankruptcy, high operational costs, obstacles in raising adequate amounts of working capital and a liquidity crisis for oil and gas companies.

Amid an uncertain business outlook, there has been a wave of spending cuts, identifying opportunities to generate cash and shoring up the balance sheet, which is making divestment an attractive option for large-cap companies.

Identifying Assets for Divestment

Evaluation has gained importance, identifying assets and key functional areas that are capable of delivering sustainable profits.

Currently, global oil and gas companies possess assets for sale with recoverable reserves of over 5 billion barrels of liquids and 7.5 billion barrels of oil equivalent of natural gas. Due to low crude oil prices, companies are doing away with mature oil and gas fields and are focusing more on key projects to reduce extra expenses associated with greenfield projects.

The recent months have witnessed oil and gas companies offering a larger portfolio of assets up for sale with an aim to improve cash flows, competitiveness and efficiency. The world’s top eight oil and gas companies: Exxon Mobil, Chevron, Royal Dutch Shell, BP, Total, Equinor, Eni and ConocoPhillips; are anticipated to sell oil and gas assets that carry a value of around $111 billion.

Oil and Gas on the Way Out in the Long Term?

The long-term value of the oil and gas assets is seen to be eroding, leaving companies with stranded assets in real time. Therefore, selling oil fields and other assets is not only freeing cash to make investments in renewable energy, but also helping the companies to pay dividends to the shareholders during the COVID crisis.

BP has been planning to sell a large portion of its assets to make investments in renewable energy. It forecasted the long-term oil price to be $55 per barrel which would leave $17.5 billion worth of its assets economically non-viable. BP plans to use the market scenario to offload its assets even if the oil prices bounce back to $70 per barrel to meet its expansion plan with respect to renewable energy.

The collapse in the price and demand of oil during the pandemic reduced billions from fossil fuels reserve value and led Shell cutting the value of its global portfolio. Its integrated gas business in Australia is expected to take a hit between $8 billion to $9 billion. Shell anticipates that its oil refinery assets will face a charge of $3 billion to $7 billion and upstream exploration and production assets’ value will fall by $4 billion to $6 billion because of its Brazilian and North American shale business. Chevron is also in search to divest its equity in eight Nigerian blocks, which includes onshore and shallow waters, to reshape its portfolio.

Are COVID Divestments the Beginning of the End of Fossil Fuels?

The growing skepticism about the value of fossil fuels due to an uncertain market scenario during the pandemic has put large oil and gas companies under major pressure to invest in renewables to achieve their low carbon emission targets. Though, the oil and gas companies are focusing to align their finances with climate goals, it is expected that there would be some divestment in the U.S. This is because the shale revolution holds a strong growth potential, making it preferable for companies to maintain their presence in the country. However, countries such as Argentina, Ghana and Guyana will witness one only one oil and gas major in operation due to divestments.

2020 posed multiple financial blockages and the risk related to stranded assets is expected to become even higher in the future. In this uncertain market outlook, it is expected that it will be the large oil and gas companies that will drive the change.

Sources and References

• https://www.offshore-technology.com/news/covid-19-has-brought-offshore-reserves-for-sale-to-above-12-5bn-boe/
• https://www.theguardian.com/business/2020/jun/30/shell-cut-value-of-assets-coronavirus-oil-price-covid-19
• http://www.businessworld.in/article/BP-Poised-To-Sell-Stranded-Assets-Even-If-Oil-Prices-Rally/07-08-2020-305934/
• https://www.forbes.com/sites/greatspeculations/2020/10/09/asset-divestitures-to-provide-an-uptick-to-occidental-petroleum-stock/#621b7ed3162e
• https://www.firstpost.com/business/chevron-profit-up-on-asset-sales-output-cuts-2020-spending-plans-8323451.html