Royal Dutch Shell says it expects to book impairment charges of up to £18bn in its second quarter after slashing expectations for oil and gas prices.
The company, which was the largest by market value on the FTSE 100 until being overtaken by AstraZeneca during the coronavirus pandemic, also reported that lockdowns globally were expected to have resulted in a 40% slump in fuel sales during the period.
Shell – the world’s largest fuel retailer – said the asset writedowns were based on weaker oil and gas price assumptions up to 2022 and also reflected its plans to reduce greenhouse gas emissions to net zero by 2050.
It cut its expected average Brent crude oil price for 2020 to $35 a barrel – down from $60 – with the forecast price rising to $50 by 2022.
Shell also slashed its long-term refining profit margin outlook by 30%.
However, it also raised its oil production predictions to between 2.3 million and 2.4 million barrels of oil per day.
Shares – down by more than 40% in the year to date as demand suffered amid the economic damage from COVID-19 – were over 2% down on the FTSE 100 on Tuesday morning.
The non-cash writedown mirrors a move by rival BP which revealed a hit of up to £14bn earlier this month.
The writedowns make grim reading for shareholders and pension funds alike as they reflect the prospect of weaker earnings ahead as dividends come under pressure.
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said of Shell’s update: “There’s nothing overly surprising about this announcement.
“Oil prices are lower, and expected to stay low for some time. As a result the value of the oil Shell’s set to pump in future is lower and the accountants have got the red pens out to mark down the value of Shell’s reserves.”
He added: “The real question going forwards is whether Shell’s fairly downbeat expectations are downbeat enough.
“Oil prices have spent a large part of the last five years under $60 a barrel and while the collapse of several large US shale names might reduce global supply, the outlook for demand is hardly robust.”