LONG BEFORE oilmen fracked the Permian basin, they came to Prudhoe Bay. Spanning more than 800 square kilometres of Alaska’s North Slope—an area the size of New York City—it remains one of the most productive oilfields in American history. In 1977 BP began pumping the black stuff from Prudhoe Bay, whence a new pipeline transported it over 1,300km of frigid wilderness to the port of Valdez. The project was a triumph of engineering and a testament to BP’s ambition. This month the British giant achieved a different feat: it sold its stake in Prudhoe Bay and other Alaskan oilfields to Hilcorp, a smaller firm. When, in April, it looked as if the $5.6bn sale might be at risk, BP said it would extend a loan to Hilcorp to help close the deal.
BP’s eagerness to sell its Alaskan business reflects a broader shift. Oil and gas firms, which report second-quarter earnings in the coming weeks, are cutting investment and trying to sell billions of dollars’ worth of resources. Even before covid-19 lockdowns hit energy demand and oil firms’ profits, investors were wary of big projects. Now the risk of costly stranded assets has grown more obvious. Last month BP and Royal Dutch Shell, an Anglo-Dutch rival, said they would take write-downs of up to $17.5bn and $22bn, respectively, on assets. The oil majors are ever keener to own only the cheapest, cleanest reserves. Getting there will be tough.
The oil industry faces a basic problem. If the price of Brent crude, the global benchmark, surpassed $100 a barrel, about 90% of the world’s oil could be extracted with a return on capital of at least 10%, according to Rystad Energy, an energy-research firm. Today Brent fetches just over $40 a barrel, making about half the world’s oil reserves too costly to produce (see chart 1). Oil prices are expected to rebound as post-pandemic demand picks up, but by how much is fiercely debated.
ExxonMobil, an American behemoth that remains bullish on future fossil-fuel demand, has declined to write down its shale assets. The impairments announced by BP and Shell last month accompanied revisions to their forecasts for the price of Brent. Shell now expects a barrel to cost $40 in 2021 and $50 in 2022, down from the $60 it assumed in its most recent annual report. BP forecasts that Brent will average $55 from 2021 until 2050. Just a few months ago its central assumption for prices over the next 20 years was $70. BP’s outlook for gas prices at Henry Hub, a benchmark for that commodity, has darkened, too, from a long-term average of $4 to $2.90 per million British thermal units.
For some petrostate-owned oil firms, current prices are high enough to keep drilling profitably but too low to balance national budgets (see article). Elsewhere high costs mean oil may simply remain below ground. In Canada only 42% of reserves can be produced with Brent at $60 a barrel, a share that falls to 16% at $40. The energy needed to extract and refine Canada’s thick bitumen makes its oil sands even less appealing. Angola in recent years passed tax incentives to promote offshore…