Fossil fuel major BP will make the biggest write down on the value of its business in a decade ago, as the coronavirus pandemic hurts long-term oil demand and accelerates the shift to cleaner energy.
In a dramatic revision that prompted questions about the affordability of its dividend, the British giant cut its estimates for oil and gas prices in the coming decades between 20 and 30 per cent.
Bloomberg newsagency reports it also expects the cost of carbon emissions to be more than twice as high as before.
Under its new Chief Executive Officer Bernard Looney, BP has been quicker than many of its peers to plan for a low-carbon world.
Yet moves toward a more sustainable future are bringing financial pain today, and investors are asking fundamental questions about the value of oil majors.
Bloomberg reports BP is reviewing its projects against those new price assumptions, which could result in some oil discoveries being left in the ground.
The risk of so-called stranded assets is just one of many challenges the industry faces as trends in energy consumption shift and policymakers pursue green targets.
The company will take non-cash impairment charges and write-offs in the second quarter, estimated to be in a range of US$13 billion to US$17.5 billion post-tax.
That could increase gearing, the ratio of net debt to equity, toward 50 per cent, by far the highest in the industry, said RBC analyst Biraj Borkhataria.
“BP now sees the prospect of the pandemic having an enduring impact on the global economy, with the potential for weaker demand for energy for a sustained period,” the company said in a statement.
“The aftermath of the pandemic will accelerate the pace of transition to a lower carbon economy.”
Last week, BP announced plans to cut 10,000 jobs worldwide, representing about 15 per cent 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 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.
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