One of the largest oil companies in the world Shell, has warned that the low price of oil could reduce the value of its assets by up to $22bn (£17.9bn). It said it expects oil to change hands at $60 per barrel in the long term. It also expects it to be priced at $35 this year and $40 next year.
Countries across the globe have ordered people to stay indoors and not travel because of the coronavirus pandemic. This restriction has caused a slump in demand for oil. As a result, the cost of oil fell to less than $20 a barrel at the peak of the crisis. This is less than a third of the $66 it cost at the start of the year.
For a brief period, buyers were actually paid to take delivery of crude oil amid a shortage of storage.
The price of Brent crude oil has recovered in recent weeks and is currently trading at $41.04 per barrel.
Before Today’s update, Shell had been banking on oil fetching $60 a barrel for the next three years. It has not previously declared a long-term price assumption.
‘Huge challenge for the future of oil-producing companies
According to Michael Bradshaw, professor of global energy at Warwick Business School, the response individuals, governments and businesses give to the Covid-19 crisis in the months ahead will have long-term implications for the environment and the future of oil-producing companies and countries.
He further said a lot will depend on whether world leaders decide to rebuild the global economy with fossil fuels. Or decide to invest in green energy, in line with the Paris climate agreement. It will also depend on consumer tastes, he added.
“For example, there is no guarantee the transport sector will fully recover. After the pandemic, we might have a different attitude to international air travel or physically going into work. This will create huge challenge for oil producers. Especially if demand and prices fail to recover sufficiently to support a managed transition to a more sustainable future.”
Oil companies like Shell and BP are trying to reform themselves as energy firms. They are gradually dabbling in greener energy and attempting to wean investors off the large dividends they traditionally pay.
for the first time since World War Two, Shell cut its dividend in April, lopping two thirds off the payments.
Still, market-watchers are considering whether these changes are coming fast enough, as Shell’s reduction in the value of its assets will make its debts look that much bigger.