Shell flags US$22 billion impairment

SHELL, which operates the Prelude FLNG in northern West Australia and the QCLNG plant in Queensland, has flagged potential impairments worth US$22 (A$32) billion for the second quarter.
Shell flags US$22 billion impairment Shell flags US$22 billion impairment Shell flags US$22 billion impairment Shell flags US$22 billion impairment Shell flags US$22 billion impairment

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Paul Hunt

Senior Journalist: Oil & Gas, Policy.

Paul Hunt

The company said its integrated gas business, would account for impairments of up to US$9 billion. This is primarily due to costs associated with QGC and the Prelude FLNG projects in Australia.

In a note this afternoon, the company announced a revision of commodity prices and margin outlooks.

Shell advised it expects impairments of between $15 billion and $22 billion in the second quarter, due to the oil price crash and low Henry Hub gas prices. 

Under its revision, the company sees Brent oil stabilising at around US$35 a barrel for 2020, but said prices would increase over the next year to $40/bbl. Brent could rise back to $60/bbl by 2023, according to Shell's outlook.

Separately yesterday Australia's Office of the Chief Economist's latest Resources and Quarterly suggests an average 2020 Brent price of a much higher $42/bbl. 

Shell's flagship floating LNG vessel the Prelude has been offline since February after starting up las year. It has a 5.3 million tonne per annum capacity made up of LNG, LPG and condensate. Nameplate LNG capacity is 3.6MMtpa. 

It has been plagued by problems including power generation and problems with sewerage. According to the National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA) the company is yet to prove its FLNG project abides by Australian safety laws. 

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 Rumors of a massive write-down have been floating for several weeks, with the Australian reporting last month that the company expected $520 million worth of impairments from QCG. 

The QCG on Curtis Island is operated by Shell, but costs are shared by its venture partners CNOOC which owns half of Train 1 and Tokyo Gas which holds 2.5% of Train 2. 

However Arrow Energy, jointly owned by Shell and PetroChina, took a positive final investment decision on their Surat gas project onshore Queensland in April, which is slated as backfill for the two train export project.

The CSG SGP will also supply domestic gas, and has been seen by analysts and economists as a rare bright spot at a time when every other major LNG backfill project has seen sanction delayed, including for Shell's Crux field offshore Western Australia, slated to go to the Prelude when its fields run dry. 

A further impairment from upstream sectors in Brazil and the North American shale patch would deliver roughly $6 billion worth of write downs. 

In the refining area, Shell expects between $3 billion and $7 billion worth of impairments. 

"These impairments are expected to have a pre-tax impact in the range of $20 to $27 billion. No impairment charge on Goodwill is expected to be recorded in the second quarter," Shell said. 

"Impairment calculations are being progressed: the range and timing of the recognition of impairments in the second quarter are uncertain and assessments are currently ongoing." 

Australia is set to lose up to $20 billion from LNG export earnings for 2020-21 thanks to a combination of low oil prices and low spot prices, dampened demand, more favourable US-Aussie dollar exchange rates and possibly marginally lower output. 

Australia exported 79 million tonnes in 2019-20 earning A$47 billion, and will export 80MMtpa for the next two years earning $35 billion and then $36 billion, this week's Resources and Energy Quarterly from the Office of the Chief Economist said.  

It estimates Australia's combined energy and resources exports for 2019-20 will earn $293 billion -- a record -- before dropping to $263 billion the following year. 

 The resources and energy sector accounted for 28% of Australia's GDP growth in 2019 resource and energy earnings will be almost 50% higher - in real terms - than during the Global Financial Crisis.