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Sanya Zaman
Driving Supply Chain Excellence at Apple | Innovating Logistics, Warehouse Operations & Business Strategy
Current Situation in Oil and Gas Industry
Oil has been so fundamental to the development of modern society in the industrialized world that the 20th century is often referred to as the Age of Oil. Today, oil and natural gas play a pivotal role in the current global energy system. Approximately 31% of primary energy used globally is met by oil-based fuels while natural gas represents a further 21% of the total world energy supply.
The global economy is under pressure in ways not seen since the Great Depression in the 1930s; businesses are failing, and unemployment is surging. The outbreak of the new coronavirus (COVID-19) has added a major layer of uncertainty to the oil market outlook. The appearance of corona virus in December 2019 in China and gradual expansion of the epidemic drastically brought down the demand and price of crude oil. On 31st of December 2019 -- on the date of reporting of COVID-19, WTI oil future was trading at US $61.06/b and price dropped to $23.36/b on 23rd March 2020, WTI crude oil futures settled at -$37.63 per barrel on 20th April 2020, down $55.90 on the day. Not only was it the largest price drop for the commodity in history at some 305.97 percent, but it was also the first time that the WTI futures market fell below $0.
Confinement measures are in place in 187 countries and territories, and although they vary in scope, activity in the transportation sector has fallen dramatically almost everywhere. In 2020, global oil demand is expected to contract to a large extent for the first time since the global recession of 2009. Even assuming that travel restrictions are eased in the second half of the year, global oil demand in 2020 is expected fall by 9.3 million barrels a day (mb/d) versus 2019, erasing almost a decade of growth.
The United States of America the largest economy in the world and the biggest consumer of oil finds itself at the top of the table of most COVID-19 infected patients. China, the 2nd largest oil consumer seems to be on the path of recovery. The intense and rapid spread of COVID-19 forced leading European oil consumers like Germany, Spain, Italy and the UK to go for lockdown. It is observed that 84 percent of the COVID infections and 94 percent of human causalities through COVID-19 happen to be in top 22 oil-consuming nations. With combined GDP of $68 trillion, these 22 countries contribute 79 percent of the global GDP. This means restricted economic activities in these countries will certainly lead to economic slowdown followed by a severe global recession.
Graph: Global oil demand growth, 2011-2025
"Global Oil demand rebound in 2021 and Asia accounts for 77% of oil demand growth through 2025"
Due to the price war between Saudi Arabia and Russia clubbed with Corona effect analysts already started correcting their own forecasts. The leading investment bankers Barclay, Morgan Stanley and Goldman Sachs revised forecast of Brent crude to $31/b, $30/b, and $20/b respectively. Also, Barclay recalibrated WTI price to $28/b.
Following a contraction in 2020 and an expected sharp rebound in 2021, global oil demand growth is still set to weaken as consumption of transport fuels increases slowly. Between 2019 and 2025, global oil demand is forecast to grow at an average annual rate of just below 1 mb/d.
Global oil demand will grow by 5.7 mb/d over the 2019-25 period at an average annual rate of 950 kb/d. This is a sharp reduction on the 1.5 mb/d annual pace seen in the past 10-year period. Following a difficult start in 2020 (-90 kb/d) due to the coronavirus, growth rebounds to 2.1 mb/d in 2021 and decelerates to 800 kb/d by 2025 as transport fuels demand growth stagnates.
‘That plummeting demand could, paradoxically, lead to a massive spike in oil prices’
The arrival of the coronavirus is rattling a global oil market that was already facing challenges. On the demand side, growth in 2019 was significantly weaker than expected and new vehicle efficiency measures have started to weigh on transport fuels.
Also, the impact of Covid-19 pandemic is particularly visible on the demand for the services industry, including Engineering, Procurement and Construction (EPC). This segment of the oil and gas value chain is largely price-sensitive and operates on low-profit margins with a heavy dependency on materials management, supply chain, workforce management and various other economic parameters.
The ongoing or new projects across oil and gas value chain are likely to face numerous challenges in terms of project execution, planning and risk management aspect from the pandemic. Therefore, how the EPC industry is coping up Covid-19 to stay afloat is something to pay attention to. It is going to be very challenging for the industry to overcome this downturn in terms of managing the workforce and cost escalations in ongoing and new projects.
According to the GlobalData analysis, the rig count drops by 20 rigs from 50 rigs reported by the end of March 2020 to 29 rigs by the end of 2020. Overall, the rig reduction is a result of capital expenditure cuts summing up to approximately $2.36bn reported by operators.
GlobalData took wells drilled between 2018 to date as a sample set assumed to be most affected by the oil price fall. The sample set consists of approximately 2,800 wells, of those, fewer than 25% have breakeven below $40 per barrel (bbl). Although crude oil prices has fallen to a record low, natural gas price outlook seems to be relatively positive despite the current economic crisis due to the reduction of associated gas production from oil wells.
There are other aspects to the crisis that could be good for the climate; potential changes in our behavior could stick with us, meaning people work from home more often, travel less and shop locally, for example. Companies that currently fly supplies from all around the world or rely on migrant labor may conclude that building things closer to home is less risky. While these may sound like the rosy predictions of green campaigners seeking a silver lining, they are in fact those of Jeff Currie, global head of commodities research at Goldman Sachs. The Wall Street investment bank is not known for environmental utopianism, its analysis is hewn from mountains of data and cold, hard facts. Currie and his team believe that plummeting demand caused by the current crisis could, paradoxically, lead to a massive spike in oil prices next year when the economy comes out of hibernation. They predict that the oil industry will not be able to keep up, leaving a gap for renewables such as wind and solar to fill.
While everyone agrees that the oil market has been battling multiple enemies over the last couple of months - namely storage limitations, overproduction, and low prices - today’s redline move was brought about by another enemy: poor timing.
Concerns around storage come as near-term WTI crude prices trade at large discounts to longer-dated contracts. That dynamic is playing out amid worry that a key storage hub in Cushing, Oklahoma, is nearing capacity, according to Bloomberg.
"Basically, bears are out for blood," said Naeem Aslam, the chief market analyst at AvaTrade. "The steep fall in the price is because of the lack of sufficient demand and lack of storage place given the fact that the production cut has failed to address the supply glut."
"The bottom line is that there is no doubt that oil prices are way oversold at the current level, but given the circumstances, it is likely that the price may continue to fall further because the rig count hasn't touched its bottom yet," he said. Oil prices and rig counts are strongly correlated. Higher oil prices make production more profitable, encouraging more producers to operate.
Last week, if you so desired, you could have purchased one of Canada’s estimated 1.7 trillion barrels of oil, for just $5. In other words, 158 liters of the world’s most vital commodity would set you back less than a pint of beer “Oil wells are very different from other industrial processes. They are organic deposits that require pressure to extract them. When you shut them down you typically do damage to the well,” says Currie. No one has ever attempted to turn off the oil supply so quickly as in the last couple of weeks. Global demand has cratered by as much as 30 per cent, or 30 million barrels a day, far in excess of anything seen in any previous downturn. Shutting in and then opening again can be prohibitively expensive, which is why producers in Canada and beyond are willing to sell oil at a loss rather than halt production altogether.
'If ever there was a time to embrace digital transformation, that time is now'
Financial uncertainty is causing some companies to rethink their budgets and investments, including allocations to technology. As we face the pandemic challenge, we are already undergoing a historic digital transformation. Cutting back now on the very tools that make people more efficient and productive is not the best approach.
Not only is digital innovation part of future-proofing, i.e., preparing for any contingency — from geopolitical crises to environmental threats to the next global health catastrophe — it is essential to keep business moving at this very moment, even if the starting point is a kitchen table at three in the morning.
Big Data analytics was transforming the oil & gas information landscape before the COVID-19 outbreak. With co-workers being miles, rather than cabins, apart, digital intelligence and cloud computing is more important than ever. If you have not transitioned to the cloud yet, there is no better time. Not only will it keep colleagues connected during social distancing, but it will also be more advantageous as remote working becomes more entrenched in the future.
The Energy Sector has seen more ups and downs in the past 5 years than ever, with oil prices plummeting and hardly rising enough it is a challenge for the companies to offer job security. With the current situation – how and when things will return to normal depends on dynamic variables, from geopolitics to travel bans across nations. For some companies, it may mean taking every measure possible to survive, while for others there may be a scope to recover by protecting their valuables (assets, people, capabilities) and acquiring smaller companies. It’s essential to think futuristically and plan for better days to come by exploring for ways to preserve what the company might need later. Austerity measures should be tempered to protect long-term objectives. While moving quickly can certainly create an advantage, knowing where the company is going makes every change more impactful.
To balance cost challenges against the possible need for new reserves, a leaner and more efficient industry is required both in execution and operation. Companies will need to be prepared to deliver significant volumes of oil and gas at competitive returns, even if prices remain low and carbon externalities are priced more accurately. The industry will undergo a new technical revolution, with significantly higher levels of artificial intelligence and automation and remote operation and management. The new leaner environment will adversely affect national revenues achievable from the oil sector.
Successful energy companies have weathered such cycles before, emerging stronger afterward, Despite the pressure down cycle cause, cool heads and measures, and informed decision making will help better position you to capitalize on the market recovery.
References:
https://www.iea.org/reports/oil-market-report-april-2020
https://www.investopedia.com/articles/investing/032515/how-oil-prices-impact-us-economy.asp
https://www.power-technology.com/comment/covid-19-outbreak-impact-fossil-fuel/
https://www.oilandgaseng.com/articles/in-a-time-of-uncertainty-get-a-firm-grip-on-operations/
https://www.pwc.com/us/en/library/covid-19/coronavirus-energy-industry-impact.html
https://www.iea.org/reports/oil-2020
https://www.dhirubhai.net/pulse/oil-industry-survive-covid-19-effects-sanjay-kumar-kar/
https://www.ft.com/content/dddb57ec-4d2d-11ea-95a0-43d18ec715f5
https://www2.deloitte.com/content/dam/Deloitte/us/Documents/energy-resources/us-2020-outlook-ogc.pdf
https://www.oilandgaseng.com/articles/in-a-time-of-uncertainty-get-a-firm-grip-on-operations/
https://www.ogj.com/home/webinar/14172686/covid19-impact-on-the-oil-gas-industry
https://www.zerohedge.com/markets/here-full-explanation-behind-oils-unprecedented-negative-price
https://www.morningstar.com/articles/979388/what-in-the-world-happened-to-oil-prices
Group General Manager at Oil and Natural Gas Corporation Ltd
4 年Good one. Very informative
Transition Fuels Analysis
4 年Thank you Sanya, I enjoyed the in-depth read. Well done!