Shell will take a writedown of up to $5bn after its decision to quit Russia as the UK-listed energy group warned extreme price volatility in commodity markets would hit cash flow.
In a trading update ahead of next month’s first-quarter results, Shell said ending its three joint ventures with Kremlin-backed gas producer Gazprom would result in a post-tax impairment charge of between $4bn and $5bn.
That is higher than the $3.4bn figure flagged by the company as the value of its Russian assets and ventures in downstream operations when it announced its withdrawal from the resource-rich nation.
Shell was one of many companies to withdraw from Russia after the invasion of Ukraine on February 24, as western groups reassessed their ties with Moscow and in some cases tore up business relationships that had been decades in the making. BP has warned that it could take a $25bn hit as a result of its decision to divest a near 20 per cent stake in Russian state oil company Rosneft.
Shell later announced it would stop new purchases of Russian oil after the Financial Times revealed it had made $20mn buying a cargo of Russian crude for one of its refineries.
Ben van Beurden, Shell’s chief executive, said at the time he was “acutely aware that our decision to purchase a cargo of Russian crude . . . was not the right one and we are sorry”.
Shares in Shell were down 1.1 per cent at £21.09 as the price of Brent crude hovered around $102 a barrel in the wake of Wednesday’s announcement by large oil-consuming nations to release a further 60m barrels of oil from strategic reserves to try to calm markets.
Since the invasion of Ukraine, oil and gas markets have been extremely turbulent over fears of supply disruptions because of the wide-ranging sanctions imposed on Moscow. The International Energy Agency has said as many as 3m barrels a day of Russian oil exports could be lost because of “self-sanctioning” by western consumers.
Owing to the “unprecedented volatility in commodity prices prevailing up until the end of the [first] quarter”, Shell said it expected $7bn of cash outflow from operations.
Big energy traders such as Shell and independent rivals such as Vitol and Trafigura have been hit with huge demands for cash to backstop the futures contracts they use to hedge deals to buy and sell commodities.
These “margin calls” have become so extreme that one lobby group called on central banks to step in and help the industry.
On the flip side, the reordering of global trade flows in energy following the invasion of Ukraine has generated lucrative arbitrage opportunities for traders. Shell is the world’s largest trader of liquefied natural gas.
In Thursday’s update, Shell said first-quarter results from both oil and gas were likely to be higher than in the same period in 2021.
Analysts at Barclays said they had increased their net income forecast for Shell by 8 per cent to $8.4bn to reflect “higher than expected integrated gas production and trading performance” and also lower costs and tax in upstream production.
Separately, van Beurden said Shell would work with the UK government on its new energy strategy, which includes a pledge to increase offshore wind capacity to 50 gigawatts by 2030, up from slightly more than 10GW at present.
“We plan to invest up to £25bn in the UK energy system over the next decade subject to board approval, and more than 75 per cent of this is for low and zero-carbon technology,” he said in a statement. “Offshore wind, hydrogen and carbon capture and storage will all be critical, but we need the right policy frameworks in place.”