Oil company says it may be forced to leave some of its fossil fuel discoveries in the ground
BP will slash up to $17.5bn (£14bn) from the value of its oil and gas assets, and may be forced to leave new fossil fuel discoveries in the ground, after its own forecasts found the Covid-19 pandemic may affect the world’s oil demand for the next 30 years.
The British oil major told investors it would take the hit, its largest writedown in a decade, because its oil price forecasts for the next three decades have fallen by almost a third.
The cut to BP’s global oil price forecasts, to an average of $55 a barrel between 2020 and 2050, could mean the oil company is forced to leave some oil and gas discoveries in the ground if the projects prove uneconomic to develop.
Last week, BP announced plans to cut 10,000 jobs worldwide, representing about 15% of its 70,000 staff, by the end of the year. Employees were told the job cuts were essential to enable the company to cope with a global collapse in demand for oil owing to the coronavirus pandemic.
BP said on Monday the company’s management team would review its plans to develop new projects in light of a “growing expectation” that the global pandemic would “accelerate the pace of transition to a lower carbon economy and energy system”.
The unexpected announcement marks the clearest sign yet that the coronavirus could hasten the global shift towards cleaner energy sources after triggering a historic slump in demand for fossil fuels to 25-year lows this year.
BP’s boss, Bernard Looney, said the company had “reset” its oil forecasts to reflect the lasting impact of the coronavirus outbreak on the global economy and the likelihood of “greater efforts to ‘build back better’ towards a Paris-consistent world” in the aftermath of the pandemic.
BP expects Brent crude oil to average about $55 a barrel between 2021 and 2050, and $2.90 per million British thermal units for Henry Hub gas, the benchmark for natural gas. The forecasts are 27% and 31% lower respectively than the average prices used in its latest annual report. Brent crude is trading at $38 a barrel.
“We are also reviewing our development plans,” he said. “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.”
Charlie Kronick, a senior climate adviser for Greenpeace UK, said the oil price reset was long overdue. “This huge dent in BP’s balance sheet suggests it has finally dawned on BP that the climate emergency is going to make oil worth less – something that smart investors have been warning for some time,” he said.
The reset is likely to accelerate BP’s plans to end its contribution to the climate crisis by 2050, which BP’s incoming chief executive revealed earlier this year. Looney is expected to set out detailed plans for BP to reduce its carbon emissions to net zero in September this year.
The new chief executive, who took the helm of the oil firm in February, told the Guardian last month that the impact of the coronavirus pandemic had deepened his commitment to shrinking the oil giant’s carbon footprint to zero.
He said he was “more convinced than ever” that BP must move towards a net-zero carbon target for 2050, set out earlier this year, by spending less on oil and gas and more on low-carbon energy sources.
BP’s shares fell 4% to 310p after the unscheduled update, making it one of the biggest fallers on the FTSE 100, as equity analysts braced for what could prove to be BP’s deepest ever quarterly loss.
The oil price reset is expected to result in write-offs of between $13bn and $17.5bn in BP’s financial results for the second quarter due later this month, which could surpass the $17bn loss reported in the wake of the Deepwater Horizon disaster in 2010.
Countries have eased their Covid-19 lockdowns in recent weeks, with non-essential shops opening in England on Monday while in France indoor cafes and restaurants are reopening. But the global economic recovery is expected to be slow as thousands of people have lost their jobs or have seen their wages cut under job retention schemes.