Australia

Oil Search counts cost of tanking prices with $570m write-down

Australian-listed energy producer Oil Search will wipe as much as $570 million off the value of its assets and could abandon some drilling projects amid growing expectations that the coronavirus-inflicted oil price collapse may not be temporary.

In what is expected to be the first of wave of revisions by Australia's top oil and gas producers, Oil Search said the impact of lockdown travel restrictions gutting demand for oil had forced it to slash the value of exploration assets because they would now no longer be developed according to plan.

Oil Search has become the first ASX-listed energy producer to announce a writedown in the wake of global price collapse.

Oil Search has become the first ASX-listed energy producer to announce a writedown in the wake of global price collapse.

"A number of exploration and evaluation assets in Papua New Guinea have been identified as being of reduced priority due to lower prospectivity or sub-optimal economics," Oil Search managing director Keiran Wulff said. "As there is no current intention to pursue activities on these assets, the full value of these exploration assets is expected to be written down."

Oil Search's announcement – a non-cash, pre-tax charge of between $US360 million-$US400 million to be included in its upcoming results on August 25 – follows the decision by oil giant BP to write off up to $25 billion. In a sign of fears the economic shock of the pandemic could reverberate for years to come, BP lowered its future oil price assumptions from $US70 a barrel to $US55 and warned investors it believed the crisis would accelerate the shift away from fossil fuels in favour of cleaner energy.

As the price of liquefied natural gas (LNG) is tied to oil, a prolonged period of lower prices could have severe implications for Australia's $50 billion-a-year LNG export industry, and imperil the viability of billions of dollars of projects awaiting final decisions off the coast of Australia due to lower-than-expected rates of return.

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"This is the first of what we expect to be a series of announcements by Australian exploration and production companies regarding a reassessment of the carrying value of their oil and gas assets under a lower oil price environment," said Gordon Ramsay, a Sydney-based analyst with the Royal Bank of Canada.

Mr Ramsay said Oil Search's write-down decision was "prudent" due to the lower price outlook and the uncertainty surrounding a key plank of a major growth project in Papua New Guinea following the breakdown of talks with the nation's government.

Crude oil futures have been trading lower, around $US42 a barrel, ahead of a mid-week meeting where Saudi Arabia-led Organisation of Petroleum Exporting Countries (OPEC) and its allies including Russia are expected to decide to ease their production cuts and modestly boost output from next month as lockdown restrictions start to relax in some parts of the world.

Luke Parker, analyst with Wood Mackenzie, said the series of write-downs by global oil majors, contained messages of "stranded assets" – those which would never be fully developed – and signified a major upheaval playing out in the oil and gas industry.

"Demand might still grow from here, and many companies are still chasing a share of that growth," Mr Parker said following Shell's write-down warning on June 30.

"But make no mistake, the corporate landscape is changing, and the majors are changing with it."

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