Shell boosts oil and gas asset value as refining soars

Company will reverse up to €4.4bn in writedowns as heightened demand and supply disruption keeps prices high

Shell said it expected to revise upwards the value of its oil and gas assets after the company raised its long-term outlook for commodity prices amid increased demand and disruption to energy flows driven by Russia’s war in Ukraine.

Europe’s biggest oil major increased its assumed 2023 price for Brent crude, Europe’s benchmark, to $80 a barrel and said it would reverse up to $4.5 billion (€4.4 billion) in writedowns previously taken on the value of its upstream oil and gas business. The total value of Shell’s production and exploration assets was recorded as $125.5 billion at the end of 2021.

“In the second quarter 2022, Shell has revised its mid- and long-term oil and gas commodity prices reflecting the current macroeconomic environment as well as updated energy market demand and supply fundamentals,” Shell said in a trading update in advance of its half-year results on July 28th.

Oil and gas majors have written down the value of many of their assets by billions of dollars in recent years as an anticipated shift away from hydrocarbons and the Covid-19 pandemic crimped forecast demand for fossil fuels.

Shell is the first to revise some of those writedowns, according to Biraj Borkhataria at RBC Capital Markets, who predicted others would follow.

“It is the first, but it won’t be the last,” he said. “Given where commodity prices are, I would expect more to come.”

Oil surged as high as $139 a barrel earlier in the year following the Russian invasion, while gas is trading at record levels. Fears of a recession have since pared prices, with Brent dropping back under $100 a barrel on Wednesday for the first time in three months, but many analysts expect the period of high oil and gas prices to persist, driven by sustained demand and limited new supply.

Restrictions on exports of Russian oil products following the invasion of Ukraine have exacerbated a shortage of global refinery capacity, pushing up prices for refined products such as diesel. Shell’s refining margins in the second quarter almost tripled to $28.04 a barrel from $10.23 in the first three months of the year. The increase would boost earnings by between $800 million and $1.2 billion, Shell noted, although investment bank Jefferies said that was lower than it had expected.

Liquefied natural gas (LNG) production in the second quarter was expected to be between 7.4 million and 8 million tonnes, it said, compared with 8 million tonnes in the first three months of the year. That included the removal of its share of volumes from the Sakhalin-2 LNG project in Russia’s far east, which would reduce earnings in the integrated gas division by between $300 million and $500 million.

Shell, the world’s largest trader of LNG, pledged to divest its 27.5 per cent interest in the project after the Ukraine invasion, and last week Moscow threatened to nationalise it. Global demand for LNG has soared this year as European buyers have sought alternatives to piped gas from Russia.

Shell expects earnings from oil and refined products trading to be “strong” in the second quarter, but lower than in the first three months of the year. It said results from gas trading would also be lower when compared with the “exceptional” performance the division recorded in the first quarter.

The $8.5 billion in share buy-backs announced for the first half of the year was completed on July 5th, it said.

Shares in the oil group rose 2.3 per cent in early London trading on Thursday, pushing up their gains for the past 12 months to 38 per cent.

— Copyright The Financial Times Limited 2022