BP assets to take up to $17.5 billion hit as it lowers oil price forecast

Oil giant BP is expecting massive reductions to asset values during the second quarter of 2020 as a result of the combined hit of the oil price plunge and the COVID-19 pandemic.

The oil major said that, as part of its strategy development, it was reviewing its portfolio and its capital development plans.

BP stated that the COVID-19 pandemic would have an enduring impact on the global economy, with the potential for weaker demand for energy for a sustained period.

As a result, BP’s management said in a statement on Monday that it had a growing expectation that the aftermath of the pandemic would accelerate the pace of transition to a lower-carbon economy and energy system so that their economies would be more resilient in the future.

With that in mind, the company revised its long-term price assumptions, lowering them and extending the period covered to 2050 so that it was 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.

According to BP, 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 stated in its revised investment appraisal long-term price assumptions that it was expecting 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.

BP also revised its carbon prices for the period to 2050 and these now include a price of $100/teCO2 in 2030 ($2020 real).

The company’s impairment and intangible assets assessments are in progress. The oil major claimed that it was not possible to precisely determine the impact of revised impairment testing price assumptions, or the outcome of the assessment of intangible assets, on the group’s financial statements at this time.

However, BP estimates that non-cash, pre-tax impairment charges against property, plant & equipment (PP&E) in the range of $8 billion to $11 billion, and write-offs of exploration intangibles in the range of $8 billion to $10 billion, will be reported in its second-quarter 2020 results.

The company also estimates that the aggregate second-quarter 2020 non-cash, post-tax PP&E impairment charges and exploration intangible write-offs will be in the range of $13 billion to $17.5 billion.

Bernard Looney, BP CEO, said: “In February we set out to become a net-zero company by 2050 or sooner. Since then we have been in action, developing our strategy to become a more diversified, resilient and lower carbon company.

“As part of that process, we have been reviewing our price assumptions over a longer horizon. That work has been informed by the COVID-19 pandemic, which increasingly looks as if it will have an enduring economic impact.

“So, we have reset our price outlook to reflect that impact and the likelihood of greater efforts to ‘build back better’ towards a Paris-consistent world. We are also reviewing our development plans.

“All that will result in a significant charge in our upcoming results, but I am confident that these difficult decisions – rooted in our net-zero ambition and reaffirmed by the pandemic – will better enable us to compete through the energy transition”.

As stated previously, BP set a new ambition to become a net-zero company by 2050 or sooner, and “help the world get to net zero.” To that aim, the firm set five aims to push BP towards net-zero.

The company then, following an in-depth review examining the alignment of the climate-related policies and activities of trade associations with BP’s positions, decided to leave three U.S.-based organizations in an effort to reach its net-zero target.

In April, BP announced its COVID-19 pandemic response with a 25 per cent reduction in capex and a promise that it would not be making any layoffs “in the next three months as a result of coronavirus cost-cutting.” That same month the company posted an underlying replacement cost profit for the first quarter of $0.8 billion, a large drop compared with $2.4 billion for the same period a year earlier.

All that takes us to earlier this month when BP stated that it would be reducing its global workforce by 10,000 this year as part of its plans to make the organization smaller and fit for the energy transition, which were “accelerated due to the coronavirus crisis.”