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Low oil prices stroke $217b global asset impairment

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Crude slides to $49.11 a barrel despite supply disruptions in Nigeria
The asset impairment in the value of global proven reserves has hit $217 billion in 2015, the largest since at least 2007, according to the U.S Energy Information Administration (EIA).

EIA said in its Financial Review of the Global Oil and Natural Gas Industry 2015, that asset impairments occur when a company lowers the estimated value of a property to reflect current market value, which may result from loss of production potential or declining oil prices.

Royal Dutch Shell and France’s Total had delayed multibillion-dollar offshore oil projects in West Africa as part of efforts to rein in costs and shore up cash flow following the collapse in crude prices.

Specifically, in Nigeria, Shell is said to have postponed until next year a final investment decision on the offshore Bonga South West project in Nigeria, which it is estimated will require $12 billion of spending. Total, for its part, has delayed a final investment decision on Zinia 2, an offshore satellite of Angola’s Pazflor field.

Brent crude prices fell yesterday, after hitting 2016 highs in the previous session, as the impact of unplanned supply disruptions of about 800,000 barrels per day in Nigeria was unable to sustain the rise due to improved supply from other countries.

International Brent crude futures were trading at $49.11 a barrel at 1135 GMT, which is 17 cents below its last settlement while U.S. West Texas Intermediate (WTI) crude futures was flat at $48.31 a barrel as at yesterday.
It said that companies were able to raise about $100 billion by selling assets and accessing capital markets to supplement the decline in cash flow.

The U.S. agency said that capital expenditure and cash flow fell $152 billion and $192 billion respectively, the largest year-over-year change in the 2007 to 2015 period.

It stated: “The companies did not add as many reserves as they produced. “The reserve replacement ratio measures the amount of reserves a company added compared to the amount it produced that year. A reserve replacement ratio above 100 per cent means it discovered more reserves that year than it produced, adding to its resource base and future potential production. Downward revisions in proved reserves partially offset new discoveries for liquids and natural gas.

“Asset write-downs reduced profits and the amount of proved reserves; proved liquids reserves declined for the first time since 2008. Production increased largely because of investment from past projects. Companies were able to access cash from capital markets and asset sales in the face of declining cash from operations. Capital expenditure fell below 2009 levels, and 2016 spending is likely to decline again,” it added.

It noted in another in its International Energy Outlook that in response to low oil prices, which have reduced expectations of future revenue (and thus expected profits), capital expenditures for investment in future production potential have been delayed or cancelled.

EIA noted however, that many OPEC and non-OPEC large capital investment projects scheduled to be completed over the next several years will continue as planned.

It expects investment to continue slowing to a point at which producers (outside of tight oil plays), which provide over 90 per cent of world crude and lease condensate supply will be unable to respond quickly to future growth in demand for liquids.

“As a result, prices are expected to return to the range of $80 per barrel within the next decade. If supply growth slows as a result of underinvestment, a sustained period of higher prices may be required to induce additional capital back into the market. Even then, long project timelines will delay the re-entry of some production from non-contiguous resources into the market”, it said.



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