(Adds context on natural gas production, quote)
By Shanti S Nair
Dec 11 (Reuters) - Oil and gas producers could wipe billions
of dollars off the value of U.S. natural gas assets in the
months ahead, analysts said on Wednesday, after Chevron Corp
became the fourth oil major to slash its estimates for
sector values.
A long, steady increase in U.S. gas production – much of it
a byproduct of the shale oil boom – has pushed prices for the
fuel toward a 25-year low. Nearly half of U.S. gas production is
a by-product of oil drilling, and therefore does not change in
response to weak prices, analysts said.
In response, BP Plc, Repsol SA and Equinor
ASA have written off more than $11 billion in total
from the value of North American shale assets just this year.
Industry players, consultants and analysts all said that
Chevron's announcement on Tuesday that it expects to write down
the value of its assets by $10 billion to $11 billion this
quarter was a sign of more writedowns, with one brokerage
highlighting exposure for Exxon Mobil.
"Chevron writing down assets – especially of this magnitude
– isn't just symbolic, it's indicative of what's to come with
impairment testing across the entire U.S. exploration and
production space," said Dallas Salazar, head of energy
consulting firm Atlas Consulting.
Mizuho Securities analysts urged Exxon's chief executive,
Darren Woods, to write down the full value of the company's $30
billion acquisition of XTO Energy. Exxon bought XTO in 2009 and
booked a $2 billion charge in 2017 against the value of natural
gas reserves from the buyout.
Exxon did not immediately respond to Reuters request for
comment.
Chevron late on Tuesday said that more than half of its
expected writedown in the fourth quarter is related to its
Appalachia gas shale assets. Shares of the company on Wednesday
closed down 1.4%.
PRICES LIKE 1995
The writedowns are broadly the result of oil companies
having assumed much higher future prices for natural gas over
the past decade.
Shell, for example, said as recently as its 2018
annual report that it expected prices would rise to $3.50 per
million British thermal units (mmbtu) in 2020 and 2021 from
$3.25 per mmbtu in 2019. BP said it had determined the size of
its recoverable reserves based on a long-term price of $4 per
mmbtu.
The main benchmark for natural gas has been below $2.70 for
most of this year and currently stands around $2.28. IHS Markit
projects U.S. gas prices will average below $2 per mmbtu next
year, the lowest prices since 1995.
U.S. drillers seeking out more valuable oil produce a lot of
unwanted associated gas, making producers insensitive to gas
price declines. U.S. energy firms were on track to flare a
record amount of that gas in 2019, especially in places like the
Permian in West Texas and eastern New Mexico.
"It is likely that undisciplined, Permian byproduct gas
production will continue to account for a significant percentage
of gas-production growth in the coming years as oil production
continues to increase," S&P Global Ratings said.
For an interactive graphic on gas producers in the United
States, click here: https://tmsnrt.rs/34gctVf
The low prices are caused by the huge gas produced by the
Permian shale oil fields in Texas and New Mexico.
"The real story is the associated gas that's being produced
out of the Permian. It puts a lot of pressure on organic
development of natural gas," said Ben Cook, portfolio manager
with BP Capital Fund Advisors LLC.
Artem Abramov, the head of shale research at consultancy
firm Rystad Energy, singled out producers in Pennsylvania's
Appalachian basin, which he said would have to make "material"
writedowns.
For an interactive graphic on the top 10 Appalachia basin
producers, click here: https://tmsnrt.rs/2LMUdfX
(Reporting by Shanti S Nair in Bengaluru, Ron Bousso in London
and Jennifer Hiller in Houston; Additional reporting by
Aishwarya Venugopal in Bengaluru; Editing by Patrick Graham,
Shailesh Kuber and Leslie Adler)
BP (BP.)
