Lagos — Shell has revised its mid and long-term price and refining margin outlook for the second quarter of 2020 to reflect the expected effects of the COVID-19 pandemic and related macroeconomic as well as energy market demand and supply fundamentals.
In a second-quarter note update released on Tuesday, the oil major said the effects of the pandemic had resulted in the review of a significant portion of its upstream, integrated gas and refining tangible and intangible assets.
In view of the above, it adopted some price and margin outlooks for impairment testing which it listed as Brent: $35/bbl (2020), $40/bbl (2021), $50/bbl (2022), $60/bbl (2023) and long-term $60 (real terms 2020).
It explained that the refining asset valuation updates reflect its strategy to reshape and focus its refining portfolio to support the decarbonisation of its energy product mix, leveraging assets and value chains in key markets.
Gas impairment testing prices of $1.75/MMBtu (2020), $2.5/MMBtu (2021 and 2022), 2.75/MMBtu (2023) and long-term $3.0/MMBtu (real terms 2020) were also adopted.
“Upstream and Integrated Gas asset valuation updates, including of related exploration and evaluation assets, are largely driven by the change in long-term prices with some impacts due to a changed view on the development attractiveness”.
Its average long-term refining margins were revised downwards by around 30% from previous mid-cycle downstream assumption.
Based on these reviews, it expects aggregate post-tax impairment charges in the range of $15 to $22 billion in the second quarter.
“Impairment charges are reported as identified items and no cash impact is expected in the second quarter”.
Indicative breakdown per segment include integrated gas of between $8 – $9 billion, primarily in Australia including a partial impairment of the Queensland Gas Company, QGC and Prelude asset values.
Upstream of $4 – $6 billion, largely in Brazil and North America Shales, and oil products of between $3 – $7 billion across the refining portfolio.
These impairments are expected to have a pre-tax impact in the range of $20 to $27 billion, adding that the goodwill intangible assets were assessed and no impairment charge on goodwill is expected to be recorded in the second quarter.
“Impairment calculations are being progressed: the range and timing of the recognition of impairments in the second quarter are uncertain and assessments are currently ongoing”
“The revised outlook for commodity prices and refining margins could impact overall deferred tax positions, which will be reviewed after the finalisation of the operating plan later in 2020.”