Chevron's charge points to billions more in U.S. gas writedowns: analysts

(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.

FILE PHOTO: The logo of Chevron Corp is seen in its booth at Gastech, the world's biggest expo for the gas industry, in Chiba, Japan April 4, 2017. REUTERS/Toru Hanai

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%.


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:

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:

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