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Oil Major Faces $800 Million In Write Downs As Price War Escalates

Shell expects the price collapse to lead to post-tax impairment charges of between US$400 million and U$800 million for the first quarter this year, the oil supermajor said on Tuesday in an updated note on the Q1 financials.


Shell, which will report first-quarter earnings on April 30, reiterated today that as per previous disclosures, the price impact on the group’s cash flow from operations (CFFO) is estimated at US$6 billion per year for each US$10 per barrel Brent price movement.  


“As a result of COVID-19, we have seen and expect significant uncertainty with macro-economic conditions with regards to prices and demand for oil, gas and related products. Furthermore, recent global developments and uncertainty in oil supply have caused further volatility in commodity markets,” Shell said in a statement today.


“The impact of the dynamically evolving business environment on first quarter results is being primarily reflected in March with a relatively minor impact in the first two months,” the supermajor noted, adding that it would provide more updates on the Q1 results and outlook for the year at the results release at the end of April.


Given the slump in fuel demand with major economies in lockdown for weeks, and probably months, Shell will slow down refinery production, with refinery utilization expected at 80-84 percent, with availability expected at 93-96 percent.  


“Refining margins are expected to be weaker compared with the fourth quarter 2019,” Shell said.


Weaker refining margins and lower realized oil, gas, and liquefied natural gas (LNG) prices had already weighed on Shell’s profit in Q4 2019.


With the price collapse in Q1 2020, Shell, like all other majors, hastened to announce capital expenditure (capex) cuts to protect its balance sheet from crashing oil prices. Majors also started to prioritize investments in the low-price environment.


Just yesterday, Shell announced that in light of the current market conditions, the group would exit the proposed Lake Charles LNG project in Louisiana.


“This decision is consistent with the initiatives we announced last week to preserve cash and reinforce the resilience of our business,” said Maarten Wetselaar, Director, Integrated Gas and New Energies, Shell. “Whilst we continue to believe in the long-term viability and advantages of the project, the time is not right for Shell to invest.”   


By Tsvetana Paraskova for Oilprice.com

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