Imperial Oil's massive write-off suggests the era of stranded Canadian assets is already here

Dec. 1, 2020

Imperial Oil just became the most high-profile Canadian oil producer to give up on some of its fossil fuel assets in Alberta.

“Imperial has re-assessed the long-term development plans of its unconventional portfolio in Alberta, Canada and no longer plans to develop a significant portion of this portfolio,” the company said in a statement after markets closed on Monday.

The company said would take an impairment charge of about $900 million to $1.2 billion in the latest quarter.

“These non-core assets are non-producing, undeveloped assets and the company does not expect any material future cash expenditures related to this impairment. Not included in this impairment are the high-value, liquids-rich portion of the company’s unconventional asset portfolio, which the company still plans to develop,” the company said.

The decision comes after France’s Total SE took an US$8 billion impairment earlier this year on the value of its assets, mostly in Canadian oilsands projects. Earlier this year, oil majors BP Plc and Royal Dutch Shell Plc had also written off the value of some of their global assets that were no longer feasible to produce.

The moves suggest Canadian fears of stranded oil and gas assets are already coming to pass.

The decision is also significant as, unlike many European oil majors, that had already divested from, scrapped or written down the value of, a number of their carbon-intensive assets, Imperial Oil and its parent company Exxon Mobil Corp. had been steadfast to date, believing their oil assets had a long runway rooms.

But the mighty are now yielding ground.

Yesterday, Exxon said it would write down the value of its natural gas properties by $17 billion to $20 billion, its biggest ever impairment, and slashed project spending next year to its lowest level in 15 years.

In another signal that the fossil fuel industry may be turning into a long-sunset industry, Bank of Montreal pledged to exit “non-Canadian investment and corporate banking energy business.”

Rystad Energy expects global oil and gas producers to invest around US$380 billion next year, almost flat year-on-year, but warns that about 20 per cent could be at risk of deferral or reduction, and most of the investments will be focused on safer tiers of low and medium-range (read less carbon-intensive) risk.

Exploration and production players are pulling multiple levers to weather the market downturn, such as deferring infill drilling programs, delaying final investment destinations and start-ups, reporting significant write-offs on stranded assets, and reshaping their portfolios to stabilize returns.

“As E&Ps are also speeding up a transition into low-carbon energy, it is possible that this time, too, upstream investments will not return to pre-crisis levels in the long-term, even if they do recover somewhat over the next few years,“ says Olga Savenkova, upstream analyst at Rystad Energy.

In a note earlier this yea,r Angus Rodger, a director with Wood Mackenzie’s upstream research, noted that a few years ago the oil industry wouldn’t even countenance ideas of climate risk, peak demand, stranded assets and liquidation business models.

“Today, companies are building strategies around these ideas. Demand might still grow from here, and many companies are still chasing a share of that growth, Rodger wrote in a note to clients. “But make no mistake, the corporate landscape is changing, and the majors are changing with it.”

[Top photo: Is oil turning into a sunset industry?]