Climate Change: BP Writes Down Up To $17.5 Billion, Forecasts Low Oil, Gas Prices Through 2050

London-based oil and gas giant BP plc (BP) said on Monday it will write down between $13 billion and $17.5 billion in after-tax, non-cash impairment charges and write-offs in the second quarter as a result of its revamped long-term strategic planning and capital expenditure outlook.

The company also predicted that oil and gas prices will remain at low levels through the year 2050.

BP explained that due to the coronavirus pandemic -- which has hammered world energy demand – the global economy will shift to a lower carbon system faster than expected. BP itself has pledged to become a “net zero” carbon emitter by 2050 or earlier.

“BP now sees the prospect of the pandemic having an enduring impact on the global economy, with the potential for weaker demand for energy for a sustained period,” the company said. “The aftermath of the pandemic will accelerate the pace of transition to a lower carbon economy.”

The multinational firm said it now expects international benchmark Brent crude futures to average about $55 a barrel from 2021 through to 2050. (Brent traded at under $38 on Monday morning).

BP also projects that “Henry Hub” gas prices will average about $2.90 over that same period. (“Henry Hub” refers to a natural gas pipeline in the U.S. state of Louisiana and is the official delivery location for futures contracts on the New York Mercantile Exchange.)

At the end of 2019, in a prior forecast before the pandemic, BP predicted Brent futures and Henry Hub gas prices that were 27% and 31% higher, respectively.

BP also said it expects the cost of emitting a ton of carbon dioxide to amount to $100 in 2030, far higher than its previous assumption of $40.

As a result of all these changes, the company vowed to become a "leaner, faster-moving and lower cost organization.”

Bernard Looney, BP’s chief executive, said: “We have reset our price outlook to reflect that impact and the likelihood of greater efforts to ‘build back better’ towards a Paris-consistent world,” referring to the Paris climate accord.

“We are also reviewing our development plans. All that will result in a significant charge in our upcoming results, but I am confident that these difficult decisions — rooted in our net zero ambition and reaffirmed by the pandemic – will better enable us to compete through the energy transition,” Looney added.

In early June, BP had said it will slash 10,000 jobs globally from its total workforce of about 70,000.

As BP prepares for a cleaner, greener energy future, it’s current financial picture is increasingly murky.

“BP’s balance sheet was stretched even without this impairment [charge], and is likely to look even more stretched following it,” said Biraj Borkhataria, director of equity research at RBC Capital Markets.

Some analysts think BP will have to cut its dividend, following the example of peers like Royal Dutch Shell (RDS-A) and Equinor (EQNR).

”It does now look increasingly likely that BP will reduce the dividend alongside the second quarter results,” Barclays said. “With the shares trading on a 10% dividend yield, this already seems to be factored into the share price.”

Environmentalists welcomed BP’s reduced outlook for its future.

“This huge dent in BP’s balance sheet suggests it has finally dawned on BP that the climate emergency is going to make oil worth less,” said Charlie Kronick, senior climate adviser for Greenpeace U.K. “BP must [now] protect its workforce, and offer training to help people move into sustainable jobs in decommissioning and offshore wind.”

The BBC's environment analyst, Roger Harrabin, commented that BP was likely compelled by business factors, not climate issues, to enact these changes, citing that one of its most important oilfields, the North Sea, is “difficult and expensive to exploit.”

"But the ramifications for the climate are potentially very significant,” Harrabin added. “Experts have been warning for years that firms have already discovered far more oil than we can afford to burn if we want to protect the climate. This, in part, is a reflection of that new reality.”

Dominic O’Connell, BBC’s business correspondent, commented that the coronavirus pandemic probably forced Looney's hand into confronting the grim realities of the oil industry.

“Not only will prices be lower for longer, but government efforts to rebuild the economy will mean a faster-than-expected shift to low-carbon sources of energy,” O’Connell wrote. “That means that the value of the oil in the ground that BP plans to develop is lower than forecast, and that some fields might never be developed… oil companies will [now] have oil fields that will not be able to be developed at all if we are to keep climate-change induced temperature increases in check.”