BP’s eagerness to sell its Alaskan business reflects a broader shift.
According to The Economist, the oil industry faces a basic problem. If the price of Brent crude, the global benchmark, surpassed $100 a barrel, about 90% of the world’s oil could be extracted with a return on capital of at least 10%, according to Rystad Energy, an energy-research firm. Today Brent fetches just over $40 a barrel, making about half the world’s oil reserves too costly to produce (see chart 1). Oil prices are expected to rebound as post-pandemic demand picks up, but by how much is fiercely debated.
Oil and gas firms, which report second-quarter earnings in the coming weeks, are cutting investment and trying to sell billions of dollars’ worth of resources. Even before COVID-19 lockdowns hit energy demand and oil firms’ profits, investors were wary of big projects.
Now the risk of costly stranded assets has grown more obvious. Last month bp and Royal Dutch Shell, an Anglo-Dutch rival, said they would take write-downs of up to $17.5bn and $22bn, respectively, on assets.
The oil majors are ever keener to own only the cheapest, cleanest reserves. Getting there will be tough.
What are your thoughts on this strategic shift?