Chevron’s $10B Impairment: “another symptom of peak oil demand and the demise of the oil industry”?

Guest oil patch news by David Middleton

Chevron recently announced that it would take a $10-11 billion charge against net earnings in Q4 2019, largely due to its exposure to Appalachia shale gas plays (Marcellus, Utica, etc.).

As a result of Chevron’s disciplined approach to capital allocation and a downward revision in its longer-term commodity price outlook, the company will reduce funding to various gas-related opportunities including Appalachia shale, Kitimat LNG, and other international projects. Chevron is evaluating its strategic alternatives for these assets, including divestment. In addition, the revised oil price outlook resulted in an impairment at Big Foot. Combined, these actions are estimated to result in non-cash, after tax impairment charges of $10 billion to $11 billion in its fourth quarter 2019 results, more than half related to the Appalachia shale.

Chevron

The mainstream media reaction was generally along these lines…

But there is far more to this than just mistimed forays into the graveyard of optimism that is the U.S. natural gas market — and not just for Chevron.

Dallas Morning News

Robert Rapier explains why this is nonsense…

Why Chevron’s $10 Billion Impairment Matters
By Robert Rapier – Dec 25, 2019

[…]

Given that Chevron earned $14.8 billion in 2018, this seems to be a significant impairment. But what does it actually mean? Let’s dive into that.

The issue of impairments like this relates to one of the most fundamental valuation indicators for an oil and gas company: the value of the oil and gas deposits it controls. Each year the Securities and Exchange Commission (SEC) requires energy producers to provide an estimate of future net cash flows of their proved reserves in the annual report (10-K filing). This calculation is called the standardized measure.

The standardized measure (SM) is the present value of the future cash flows from proved oil, natural gas liquids (NGLs) and natural gas reserves, net of development costs, income taxes and exploration costs, discounted at 10 percent annually. The SM must be calculated according to specific guidelines set by the SEC, and is a GAAP measure. (GAAP stands for generally accepted accounting principles, the most formal and inflexible set of rules for assessing a company’s finances.) All oil and gas firms traded on a U.S. exchange must provide the standardized measure in filings with the SEC.

The SM is calculated based on the average prices received over the past 12 months for oil, NGLs and natural gas. In a nutshell, it’s an attempt to account for the value of the reserves that a company is likely to develop based on certain defined criteria.

That value can be impacted by changes in commodity prices, or by changes in a company’s plans. In Chevron’s case, it looks like both played a factor. Appalachia shale gas production continues to grow rapidly, and that is keeping natural gas prices depressed. That situation doesn’t look like it will change soon, so companies are reevaluating their plans there.

Some have misread Chevron’s write-off as something akin to “This is yet another symptom of peak oil demand and the demise of the oil industry.” That’s inaccurate. These write-offs aren’t a function of falling demand. They are a function of supplies rapidly expanding, and outpacing demand.

[…]

These impairments are included in net income, but represent only a paper loss. They don’t affect cash flow…

[…]

Significant impairments like this generally attract a lot of media attention, while substantial increases to a company’s future cash flows do not.

Oil Price Dot Com

Robert Rapier and Jude Clemente are about the only two oil & gas industry analysts worth reading on Oil Price Dot Com or Forbes.

Advertisements

106 thoughts on “Chevron’s $10B Impairment: “another symptom of peak oil demand and the demise of the oil industry”?

  1. Robert Rapier has provided consistent information about the oil industry for many years. He is especially accurate in the alternative energy area and is worth reading.

      • The old newspaper adage at work: “If it bleeds, it leads.” They need for everything to bleed theses days.

    • One detail I see being ignored here is that it appears that the write-down is concentrated on the Shale Gas plays that Chevron has invested in. Nat Gas has proven to be a very different market than Oil, and due to a glut in nat gas supplies due to fracking success, it seems clear that Nat Gas prices are going to stay quite low for at least a decade. (maybe forever) Chevron’s writedown of those assets is justified, but that is a North American market situation, and has little to do with the international oil markets.

  2. Only a fossil fuel shill would post an article like this on the world’s most viewed site on global warming and climate change.

    • David is very publicly a geophysicist in the oil and gas industry.

      Are you a shill for morons or something?

      • sycomputing, neither you, nor I know if Dave has taken advantage of the recent ability of people of the same sex to get married. If he has, I’m sure his boyfriend is happy also.

          • Wow, you are old……no wonder you shill for the fossil fuel industry

            (You should get on topic, explain in some detail WHY you don’t like his blog post, making unsupported accusations over and over is unacceptable) SUNMOD

          • That christina thinks that calling someone old is an insult, just demonstrates how undeveloped her social skills are.

        • sycomputing, neither you, nor I know if Dave has taken advantage of the recent ability of people of the same sex to get married.

          Well even if that were true, my point still stands doesn’t it? You’d still be barking up the wrong tree there wouldn’t you girlie? Why sure you would . . .

          🙂

        • Wow, Christina has “old white guy” bigotry. When your ignorance and arrogance are leading the pack in your talent, it may be best to retire for a bit.

        • Yet more evidence for how socially undeveloped christina is.
          Beyond that, the mere fact that she hasn’t been banned shows that WUWT is much more tolerant of alternative opinions than any of the sites she prefers.

    • About Watts Up With That:
      News and commentary on puzzling things in life, nature, science, weather, climate change, technology, and recent news by Anthony Watts [ & over the years, others ]

        • I guess you must be alluding to the “97% of climate scientists agree” that they don’t know schist about the subject.
          Actually, there have never been any such surveys, so the point is mute.

          • I believe you meant moot (To render [a question, matter, etc.] irrelevant or of no practical significance.) vs. mute (silent).

        • Christina,

          Then you offer nothing in the way of constructive criticism of the blog post, must be too hard for you to do, insults and personal attacks is apparently all you have to offer here.

    • Widmann
      Do you have an issue with the accuracy of any of the facts? If not, then it would seem that you are just attacking the messenger.

    • “Only a fossil fuel shill would post an article like this on the world’s most viewed site on global warming and climate change.”

      Christina, no article could be more pertinent to global warming….than pointing out the lies. fake news, and flat out media fr a u d

        • Christina, ‘finances’ and ‘fake’ news aside in regards to fossil fuels, I don’t see why you don’t support the use of these invaluable resources 100%! And just to be clear I truly do believe that in this point in time they are invaluable.

          And mines, you have to just loves mines and thanks to the likes of you we are opening new mines of every kind all over the world. Again, to be clear, mines do indeed have their place, but not when the resources are being totally wasted.

          Do you know that rare earth mines are necessary for the production of EV batteries, wind turbines and solar panels?

          Do you know that they extract the rare earth materials from vast open cut mines and that the the materials are extracted using acids? The standards in regards to operation of these mines is less than ideal in many countries, people suffer and greed prevails.

          Do you know that the byproduct of this process is a black toxic sludge that no one knows what to do with? In China they have simply created a lake of ten square kilometres. It would be a similar disposal in third world countries.

          Without having even left the mine materials are being trucked around the site. Have you seen the trucks on mine sites? They are huge and they do not run on electricity!

          The materials are trucked to the manufacturing plants, more petroleum products used. The manufacturing plants need massive amounts of energy to produce wind and solar renewables. Now, the factories might make ‘them’, but not on the energy that ‘they’ produce. These factories run on coal fire power electricity, and lots of it!

          The completed products are trucked to the ports to be shipped globally. More petroleum products used, and have you actually seen a wind turbine in transport? They are getting bigger all the time, these trucks cost $1.5 million and you need more than one to move a turbine to installation.

          Can you imagine how much in the way of ‘fossil fuels’ are used to create your precious wind and solar renewables? Not to mention the ecological and sociological damage you left behind in China and other third world countries!

          We haven’t even installed them yet. It’s no use using the NIMBY euphemism. After all, would you buy a house next to a wind or solar farm if you could buy one in a similar setting that didn’t have them? How would you feel if you spent your life savings building a new home only to have a solar farm go up next door? You don’t have a choice.

          Wind and solar energy are totally inefficient, people talk about the ‘free’ energy from the wind and sun. What about the cost so far? What about the many thousands of hectares of land it takes up, much of it prime agricultural? What about the thousands of birds and bats that die each and every year? What about the risks of cadmium and lead leaching into the soil and waterways in the event of a severe storm or hail event? Most people in the country rely on tank water from their rooftops, a hailstorm damaged solar installation could potentially poison hundreds of thousand litres of water.

          But wait there’s more, there is not one recycling plant operating here in Australia for wind and solar renewables. Our population is around 25million people. I believe the population of the US is greater than 350million and they have a small number of plants recycling on some level, materials easily processed. Recycling of these renewables is mandated in parts of Europe but their is in fact little being done anywhere in the world. Recycling of these renewables is a very costly venture. It’s also a toxic process using acids and such. The rare earth materials are extremely difficult to recover which means it’s cheaper to buy them from new. The fact is that at the moment most of them are ending up in landfill, an ecological disaster.

          So much for your precious ‘clean energy’. What an absolute joke!

          Like I said, there definitely is a place for ‘fossil fuels’ (and that encompasses petroleum) but we are using enormous amounts of it for the production of wind and solar renewables on the premise of reducing CO2 and that is just nothing short of criminal! Even if it made a difference, production of renewables are creating additional CO2, not reducing it. What a waste of resources.

          We would be much better placed to use fossil fuels till we can establish nuclear energy. This would in fact be kinder to the environment and the global economy.

          One more thing, though I am not a scientist there are many like me who enjoy debates such as these and to learn a thing or two at the same time. I at least have in spades that which you lack in total and that is common sense. You are a fool if you believe that 3% lie and you are a fool if you can’t see that a scientist with no skepticism is not really a scientist, he or she is simply parroting an opinion.

    • Halfwit Christine fails to understand that if demand > supply then price increases whereas if supply > demand then price falls. This write-off is therefore a sign of a plentiful future for oil. Obvious to everyone but a Leftist.

      • They said we would run out of oil 40 years ago. Then they adjusted their theory after that did not happen and said that peak oil would happen by around 2000-2005. Write off whatever they say.

    • Christina, stay over there at Desmogblog with Lefebvre and his buddies.
      I work in the oil industry as well. Should I be ashamed?
      You’re a mindless troll.

    • Only a leftist shill would make such a comment. Oil & gas and US being a net exporter is really getting your goat now isn’t it. Another take of bad new for ya!

      “Chevron’s latest multi-billion dollar asset write down indicates one thing: that oil glut is real and will continue to affect oil prices (NYSEARCA:USO) in 2020. In fact, I won’t be surprised if even other oil majors come up with similar write downs in near future. In my earlier article on oil, I had focused on the downward effects of rising global crude oil inventories on oil prices. The market is aware that the current spike in oil price is not related to supply-demand fundamentals, but on expectations that U.S. – China trade war has finally de-escalated.”

      Mean while OPEC has cut production by 500,000 barrels which kind of says it all about the current supply.

    • Christina,

      Maybe you haven’t noticed, but fossil fuels power our modern world and all the things that keeps us from living like rats in a cold, damp cave or thatch/mud hut. You’d be cooking your freshly killed deer or squirrel meat, if you even had that protein, along with some washed-in-dankwater tubers and roots over a dung or stick fire pit, while watching your infant children die of diseases and malnourishment during a hard winter unable to keep the cold away.

      – The electricity you are using on your computer or mobile device? Most likely came from fossil fuels.
      – The device itself, made with plastics and lots of high tech parts, were made from fossil fuel derived pre-cursor materials. I’ve yet to see a cell phone carved from wood, or made from clay.

      Even if you are wind and solar power believer…
      – The impact-resistant glass covering for solar panels? Fossil Fuels made that.
      – The carbon-fiber blades of wind turbines? Fossil Fuel.
      – The 1,000 kilograms or so of copper wire in every wind turbine generator? Fossil Fuels at every step from the mining of raw ore to making the wire to winding the generator stators.
      – The 100-200 tons of kiln-cooked cement to anchor a modern wind turbine? Fossil fuel.

      And your everyday living needs?
      – The diesel, gas/petrol you put in your car to get you to grocery store? Fossil Fuels.
      – The asphalt roads you drive/ride on on every day, even if it is with fossil fuel-made bicycle or bus? Fossil Fuels.
      – The nice, wide selection of fruits veggies you select at that grocery store in the dead of winter?
      Grown and transported to you using fossil fuels at every step. And many winter veggies are grown in hot houses with CO2 pumped in or added by burning natural gas to improve growing.
      – The stretchy fabric synthetic material clothes you may like to wear from LuLuLemon and such? Fossil Fuels.
      The list is very long.

      Thankfully we have fossil fuels and nuclear power that are reliable. Those wind turbines… they are just killing more birds and raptors with each turn and stop turning when the wind stops. And those solar panels? They only work during sunlight, if you didn’t notice. And most of us like electricity at night and when it’s cloudy.

      So Christina, I’d suggest YOU stop Shilling for the Rich Liberal Ignorati who wants the middle-class to return to serfdom and peasantry.

    • Thanks, Christina, “fossil fuel shill”, I bet David adds that to his substantial collection of titles, but if you want to insult someone with geophysical tendencies you have to get closer to being snipped to do any damage. Just Saying.

      • Do you really think that David doesn’t already have the T-shirt?

        Although maybe not – mine seems to have been lost in the mail. Maybe it’s wherever the check from Exxon went off to…

    • Christina,
      That is one of the most profoundly ignorant things I’ve ever seen posted on here, and that’s saying something. Maybe if you presented a cogent argument instead of throwing insults at respected experts in the subject at hand, you would make a better impression.

    • Christina,

      Although I it is likely that you have been chased away, & unlikely you won’t respond, I will give it a shot anyway …

      I would like to protect myself from propaganda from fossil fuel shills & I don’t know much about the whole thing; would you please be kind enough to provide a list of the better know shills (like middleton) that I need be wary of ?

      Thanks in advance.

  3. We really need to ramp up the exports. We’ve become a net exporter of hydrocarbons this year and we can do much more. There’s probably nothing that will balance trade more than our booming oil and gas industry.

    • Right on, RWT, and our becoming a significant exporter of hydrocarbon products will somewhat disarm those loonies in the middle East. Press On!

    • It would be better to export refined products so that the good paying jobs from refineries and manufacturing can leverage on affordable oil and natural gas here.
      Make fertilizers and plastics, export that.
      Make finished goods like ceramics and porcelains that require lots of energy using abundant cheap natural gas here, export that.

      Simply exporting all our unrefined oil and LNG would lead to society without a manufacturing base or high tech industry, a Saudi Arabia. Maintaining our deep industrial base running on domestic FF would then keep the fossil fuel-hating Rich Liberals from ever succeeding in attempts to shut down the economy for their renewable energy-wealth transfer schemes to impoverish the middle class. Germany is well on its way to impoverishing its middle class to serfdom and turning its country into a vassal state for Putin to control via Russian natural gas.

    • You can tell where they’re coming from right off the bat when they pop up out of nowhere and think they should have a say about what gets posted at another persons blog. Dead give away.

  4. That’s Chevron’s GAAP-stated income that we’ll see on Wall Street. Does the same write-off apply to their taxable income?

      • David- on a somewhat unrelated topic I have a question for you. Outside shale oil, the accepted depletion rate for worldwide production is 5-7%. Yet the decline rates at the surface are running much less than that and its been that way for years. Are producers keeping the decline rates in check by drilling more and more wells into existing reservoirs ? Are they simply putting more straws into the same old fields ? And if so, won’t that accelerate reservoir depletion even faster ?

        • Decline rates are functions of individual reservoirs. More wells doesn’t affect the decline rate.

          Decline rates can be managed to some extent by production rates. A lower production rate generally yields a lower decline rate. It usually comes down to adjusting the production rate to maximize the economic recovery.

  5. Yet for what ever reason, the most brilliant Peter Lynch,
    Fidelity fund manager of Magellan, has suggested bright
    prospects for the entire energy complex, including natty.

    As for Ms Christ tina, she is just full of gas and had to relieve
    herself.

  6. The good news is that production exceeds expectation. The bad news is that production exceeds demand. We need to increase refinery capacity and set prices accordingly.

  7. The black blob, organic, green, and viable, despite efforts to deem it otherwise, but, ironically, not Green.

  8. Horizontal drilling and fracking thousands of feet of laterals has made oil and gas production akin to farming except there is not a year waiting for the crop to come in. Thus the high peak in prices are not experienced since production is ramped up fairly.

  9. Revenues and cashflows are not impacted, which means the dividend is safe. Currently, it is at 3.96%. If the stock is oversold because of news like this, and the dividend rate is pushed over 4%, you might want to pick up some stock. Current CD interest rates are about half that.

    The oil industry is about the only laggard in the stock market. The abundant supply of oil and gas limits the upside potential of the stock price, but a safe, solid 4%-5% return is hard to get. And we know if we quit using oil, society can not function.

  10. There are geopolitical implications to the continued lower price of oil. First, the US economy grows more. Second, countries that depend on oil money to fund their military (Iran, Russia, etc.) have less money to play with. Iran cannot fund as much terror as they would like to because they are both embargoed and the price of oil is low. China is a mixed bag since their economy is stronger with lower energy cost. But with more money, they can afford to prop up the North Korean regime. Now if we could convince the European Union to allow African countries to use DDT…

  11. Christina, your lack of understanding of basic accounting terminology suggests your checkbook is rarely balanced.

  12. David

    Maybe some day you could work up a blog post explaining why diesel, as less refined product than gasoline, is considerably more expensive per gallon than 87 or 89 octane gasoline?
    Fuel is the single largest operating expense in the trucking industry. Trucks carry nearly everything we Americans use and consume. Though people obsess over the price per gallon of gas they don’t seem to realize or forget that the cost of diesel is a big factor in determining the cost of nearly everything they buy or build.

    • That is pretty self obvious because you can extract more energy per volume 36.9 MJ/litre compared to 33.7 MJ/litre for petrol.

      The refining process has zero to do with that difference.

    • From the EIA

      Why are diesel fuel prices higher than gasoline prices?
      On-highway diesel fuel prices have been higher than regular-grade gasoline prices, on a dollar per gallon basis, almost continuously since September 2004. This trend is a break from the previous historical pattern of diesel fuel prices usually being lower than gasoline prices except in cold winters when demand for heating oil pushed diesel fuel prices higher. There are three main reasons why diesel fuel prices have been higher than regular gasoline prices in recent years:

      • Demand for diesel fuel and other distillate fuel oils has been relatively high, especially in Europe, China, India, and the United States.
      • The transition to less polluting, lower-sulfur diesel fuels in the United States affected diesel fuel production and distribution costs.
      • The federal excise tax for on-highway diesel fuel of 24.3 cents per gallon is 6 cents per gallon higher than the federal excise tax on gasoline.
      • I would guess that the excess refining capacity for gasoline became higher than that of diesel somewhere around 2004. It’s never possible to perfectly balance supply with demand.

        • David, I remember hearing that some diesel was being mixed with “renewables” and being shipped to South and Central America for tax break or renewables credit. Maybe that is not a factor anymore?
          Mac

          • That’s probably not relevant to the price differential. I think it is a function of the ratios of refining capacity to demand for both products… But, I haven’t “done the math”… yet.

          • Two things happened in the early 00’s to affect the gasoline/diesel cost differential:

            – The introduction of low sulfur diesel in the US (to 15 ppm from 500 ppm)
            – The shift in European cars toward diesel

            The first reduced production by removing marginal producers from the market. The second created a trans-Atlantic trade in diesel to Europe and gasoline to the US. This has placed upward cost pressure on diesel and downward pressure on gasoline.

            Refineries have a limited ability to swing production between gasoline and diesel without significant investment. We’re talking billion dollar investments. I’m retired now but current pricing does not look like it supports these kinds of investments and no one wants to go through the permitting gauntlet these days.

            Unless the differential between diesel and gasoline gets really out of hand don’t expect to see any changes soon.

        • Well they sure haven’t made much progress in doing that. During the last recession when big truck traffic was way down, and thus demand was way down, the price did not come down relative to gasoline. Also there are far more big trucks on the road right now than I have ever seen in nearly 15 years as a driver. So many that the five your projections for a shortage of drivers for the lower 48 has gone up from 33,000 to nearly 80,000 in the last three years! Yet diesel pricing remains about the same price difference compared to gas that it was 5 years ago. Now a bit of that could be the result of an increase in the number of big trucks running NG but still this driver has come to the conclusion there is most likely some kind of artificial price fixing going on.

          • Other way around. Diesel blue, gasoline brown. They track closely and I imagine the greatest divergence occurs during the cold winters when there is a heightened demand for fuel oil in predominantly the NE US. But still does not make sense to me that diesel remains higher than gasoline even with the 6 cent per gallon federal excise. We pay for highway usage through IFTA, higher tolls on toll roads, and certain states like NY, OR, NM have their own separate usage tax permit on top of the IFTA. I avoid fueling as much as possible in PA, IL, and CA because of confiscatory fuel tax rates.

    • When I was a kid, diesel was cheaper than gasoline.
      Then they started making cars that ran on diesel. A few years after that, diesel started getting more expensive.

  13. Silly stuff aside, OilPrice.com is reporting some seriously bad news about shale.
    EQT’s Schlotterbeck is quoted, “The shale gas revolution has frankly been an unmitigated disaster… with very few, limited exceptions. I’m not aware of another disruptive technological change that has done so much
    damage to the industry that created the change.” He says the average shale company has obliterated 80% of its market value in the past decade.

    It is critical that these firms survive – oil/gas is essential. Trouble is, the attempt to securitize, asset-backed, guarantees more bankruptcies.

    • The equity destruction was almost entirely due to the collapse in oil & gas prices from 2014 to 2016. Companies that managed to survive and reduce costs are doing just fine…

      Only one of Appalachia’s leading drillers, Cabot Oil & Gas Corp., has seen its value increase in 10 years, up more than 200%, according to S&P Global Market Intelligence data. The rest have posted losses of 80% and 90% of their value, Schlotterbeck said. His analysis did not include New York’s integrated natural gas company National Fuel Gas Co., which has drilling, pipeline and downstream gas utility units and has seen its share price increase more than 50% in 10 years. In the past five years, an index of the top 10 publicly traded exploration and production companies has lost 81% of its value, according to S&P Global Market Intelligence data.

      https://www.oilandgas360.com/former-eqt-ceo-shale-gas-revolution-an-unmitigated-disaster-for-investors/

      Cabot and NFG have maintained finding & development costs below $2/mcf and are generating positive free cash flow and net earnings.

      Due to the 2014-2016 collapse, the market is still treating oil & gas companies as if oil is $35/bbl and gas is less than $2/mcf. This won’t change until the production growth begins to level off in the Marcellus (Appalachia) and Permian Basin

    • Unless you are an investor in, or to a lesser degree an employee of one of those companies, why be concerned whether they remain in business or have to sell their assets to a more efficient operator? Yes, oil/gas is essential, but it isn’t going to disappear from the ground just because a group of investors made bad decisions and other investors get an opportunity to buy their assets.

  14. Chevron: …a downward revision in its longer-term commodity price outlook, the company will reduce funding to vaious gas-related opportunities including Appalachia shale….”

    The USA should take advantage of it’s “over supply” of natural gas by creating a demand to consume the surplus. Compressed Natural Gas Vehicles (CNGV) have moved in and out of favor for decades. The Mercellus should have been the driver to make CNGV’s the transportation fuel of choice here in America. If the idiotic government would stop subsidizing EV’s from every imaginal direction and let the market work we would probably be there already.

    Why burn natural gas in a $multi-million generating station to squeeze electrons into power lines and transformers, that are operating at near full-capacity to charge a battery that doesn’t work in cold weather and doesn’t last as long as the vehicle? Avoid the expense and waste of converting the natural gas to electricity and simply burn it in transportation vehicles.

  15. Would declaring impairment accelerate tax deduction of operating costs?
    I’m just trying to figure out how this relates to the U.S. political landscape, say, five year from now.

Comments are closed.