Glimpse into dynamics of post-pandemic oil industry

CAIRO - 21 January 2021: Since its discovery in 1859, oil has been the main source of energy, and main source of income for many countries. The finite resource was subject to major hits in the past three decades. The last of which took place last year. However, the sector has begun recovery paving the way for figuring out demand levels, and hence, estimating supply and investments in the sector.

 

Speculations on the Short, Medium, and Long run

 

In an event held by Reuters in December, President and CEO of Pioneer Natural Resources Scott Sheffield showcased that negative rates did not just appear in 2020 but also in 1991, 1996, 2008, and 2014. He underlined that last year's crisis occurred due to two reasons, which are the price war and the COVID-19 pandemic.

 

With regard to demand, Sheffield argued that people are ready to travel, which will generate demand on fuel. He estimated that in 2021 Brent Crude oil can record $45 per barrel. However, it is currently nearing $55 per barrel.

 

The CEO stated that the break-even used to be $50 per barrel, and that $30 per barrel covers the dividends. Furthermore, he noted that stabilizing Brent Crude oil at $50 per barrel will require two years, so it can be achieved in either 2022 or 2023.

 

The same speculation about recovery by 2022 is shared by Executive Vice President Upstream of Cenovus Energy Norrie Ramsay.

 

Sheffield added that the market will be tighter between 2023 and 2025 because of little spending in exploration and because it will take two years to regain investors' trust. As for access to capital, the CEO said that the private equity market is going through tough time. He also speculated that consolidations will take place.

 

President and CEO California Resources Corporation Todd Stevens said that a main factor that pushes down demand on oil is climate change and eagerness to reduce the use of fossil fuel products. Nevertheless, natural gas is still needed as well as petroleum projects, Stevens pointed out.

 

President of BHP Petroleum Geraldine Slattery estimated that demand on oil will reach a plateau in the 2030s on the medium-run. She added that the price of oil will be shaped by the supply side on the medium and long run given it is a depleting resource, and that demand still plays a pivotal role on the short run. The BHP Petroleum president highlighted that heavy vehicles compose 14 percent of demand on oil so as such percentage will fall when they are electrified. She also predicted that oil supply will decline by three percent on the short run post the pandemic.

 

Speaking of gas, Slattery showcased that gas prices will come back to balance by no earlier than 2020s as they have been declining. In that sector, there is demand on the long run, the BHP Petroleum president stipulated saying that gas "exists in abundance but good infrastructure is needed to optimize the supplying process."

 

The Bumpy Road of Oil Corporations 

 

Assistant Professor at the Faculty of Political Science and Economics at Beni Suef University Mohamed Rashed tells Business Today Egypt that the impact on oil exporting countries whose income mainly depends on the resource is embodied in the rise of budget deficits. "As a consequence, they will have to rely on their reserves causing them to deplete fast, if the duration of the lockdown is prolonged in many countries all over the world until their peoples are vaccinated," Rashed explains.

 

The economics professor speculates that demand in the first half of 2021 will relatively stabilize because of the measures taken by OPEC+ in April 2020. The demand on oil in 2021 is estimated to be 98 million bpd. "Nevertheless, Saudi Arabia's unilateral decision to cut production by one million bpd in February and March can induce an uptake of crude prices to approach $60 per barrel as long as the value of dollar is still weak. That can be an incentive for corporates to back down on their decisions to halt their investments and development of oil fields. Hence, we can see drilling rigs going back to work," Rashed clarifies.

 

"The fall in oil prices definitely has a negative influence on petroleum companies' investments in exploration works. That is because the decline in revenues compared to the rise in fixed costs of drilling will require a larger number of years to recover the drilling's fixed costs," the economic expert points out.

  

"The value of shares of oil corporations dropped massively and to the half in some cases because of the fall in crude oil prices. Such decline had repercussions on those corporations' profits, and some of them endured losses making lay-offs necessary. The only chance those companies can make up for their losses is the rebound of oil prices on the medium and long run along with the rise in demand, and the decline in supply due to investment cuts," Rashed showcases.

 

"It is very possible that consolidations will happen willingly in the sector out of oil corporates' fear of bankruptcy and capital depletion as a consequence of accumulated losses, particularly if the duration of the pandemic gets longer. Out of crises, consolidations emerge as a way of circumventing financial collapse in any sector," the economics professor underlines.   

 

Roots of the Crisis and Collective Decisions

 

Reuters issued in August a report titled "The Future of Oil and Gas: A 2020 Market Report." The report began by explaining the reasons the demand on oil and gas decreased. One of the reasons is that a large share of demand is held by one country, which was the origin of the pandemic. The report indicates that in 2019, China was the largest importer of oil and gas as it accounted for more than 80% of global demand. Its crude imports in 2019 went up by 11% compared to 2018. China relied on imports to cover 75% of usage, and was stockpiling in time of pricing dips. Between 2003 and 2013, China's production of oil declined by 15% while its imports rose by 30% to record 10.12 million bpd.  

 

The demand also plummeted because of the suspension of work in large construction projects, lack of investment in infrastructure, and fall of electricity loads. Goldman Sachs estimated that as of close-March, global oil demand fell by 25%.

 

Early in March, the Organization of the Petroleum Exporting Countries (OPEC) and ten additional oil producing countries (OPEC+) wanted to cut global production by more than 15 million bpd over Q2. As such, Russia would have to reduce its production by 0.5 million bpd. Hence, it refused and oil prices dipped by 10%. In response, Saudi Arabia "introduced price discounts of between $6-8 per barrel to import customers across Europe, Asia and the US."

 

As a consequence, the West Texas Intermediate (WTI) dropped by 20%, and moved to negative territory on April 20 for the first time ever. Failure to halt production as a result of falling prices - and by consequence depletion of storage capacity - coupled with decreasing demand, led to -$37/bbl in April.

 

On April 12, OPEC+ decided the following quoting Reuters report:

 • Adjust downwards their overall crude oil production by 9.7 million bpd, starting on 1 May 2020, for an initial period of two months that concludes on 30 June 2020.

• For the subsequent period of 6 months, from 1 July 2020 to 31 December 2020, the total adjustment agreed will be 7.7 million bpd.

• It will be followed by a 5.8 million bpd adjustment for a period of 16 months, from 1 January 2021 to 30 April 2022.

• The baseline for the calculation of the adjustments is the oil production of October 2018, except for the Kingdom of Saudi Arabia and The Russian Federation, both with the same baseline level of 11.0 mb/d.

• The agreement will be valid until 30 April 2022, however, the extension of this agreement will be reviewed during December 2021.

 

 

By mid-May, prices hiked by 80% to be over $30 per barrel because of OPEC+ curtailments, a US campaign to reduce output by four million bpd, and a KSA initiative to decrease production by one million bpd. However, producers may increase production to benefit from rising prices in reducing deficits, the report estimates.

 

In December 2019, the price per barrel was $67.31. Later on, it kept slumping until it reached $18.38 in April. Since the following month, it has been recovering until it reached $48.52 in December 2020.

 

In the 2015 oil price crash, investments dropped by 40 percent but production increased because of the efficiencies carried out. On the contrary, the ongoing crisis is different.

 

"The 2020 crash will hit the upstream industry harder when CAPEX investment drops. Majors have already announced cuts in budgets somewhere around the 20% level, exceeding $80 billion across the sector by mid-April," the report indicates.  

 

"For producers, the easiest way to cut budgets is to not start projects, delaying that spend into the future. For sanctioned projects, companies will be looking at contracts and assess what can be cancelled. With contracts typically running lower costs of exiting, it will be projects under development that will be hit. For insight projects and oil producing assets, anything that is discretionary will likely be cut," the report showcases.

 

 

 

Speculations on the Short, Medium, and Long run

 

In an event held by Reuters in December, President and CEO of Pioneer Natural Resources Scott Sheffield showcased that negative rates did not just appear in 2020 but also in 1991, 1996, 2008, and 2014. He underlined that last year's crisis occurred due to two reasons, which are the price war and the COVID-19 pandemic.

 

With regard to demand, Sheffield argued that people are ready to travel, which will generate demand on fuel. He estimated that in 2021 Brent Crude oil can record $45 per barrel. However, it is currently nearing $55 per barrel.

 

The CEO stated that the break-even used to be $50 per barrel, and that $30 per barrel covers the dividends. Furthermore, he noted that stabilizing Brent Crude oil at $50 per barrel will require two years, so it can be achieved in either 2022 or 2023.

 

The same speculation about recovery by 2022 is shared by Executive Vice President Upstream of Cenovus Energy Norrie Ramsay.

 

Sheffield added that the market will be tighter between 2023 and 2025 because of little spending in exploration and because it will take two years to regain investors' trust. As for access to capital, the CEO said that the private equity market is going through tough time. He also speculated that consolidations will take place.

 

President and CEO California Resources Corporation Todd Stevens said that a main factor that pushes down demand on oil is climate change and eagerness to reduce the use of fossil fuel products. Nevertheless, natural gas is still needed as well as petroleum projects, Stevens pointed out.

 

President of BHP Petroleum Geraldine Slattery estimated that demand on oil will reach a plateau in the 2030s on the medium-run. She added that the price of oil will be shaped by the supply side on the medium and long run given it is a depleting resource, and that demand still plays a pivotal role on the short run. The BHP Petroleum president highlighted that heavy vehicles compose 14 percent of demand on oil so as such percentage will fall when they are electrified. She also predicted that oil supply will decline by three percent on the short run post the pandemic.

 

Speaking of gas, Slattery showcased that gas prices will come back to balance by no earlier than 2020s as they have been declining. In that sector, there is demand on the long run, the BHP Petroleum president stipulated saying that gas "exists in abundance but good infrastructure is needed to optimize the supplying process."

 

The Bumpy Road of Oil Corporations 

 

Assistant Professor at the Faculty of Political Science and Economics at Beni Suef University Mohamed Rashed tells Business Today Egypt that the impact on oil exporting countries whose income mainly depends on the resource is embodied in the rise of budget deficits. "As a consequence, they will have to rely on their reserves causing them to deplete fast, if the duration of the lockdown is prolonged in many countries all over the world until their peoples are vaccinated," Rashed explains.

 

The economics professor speculates that demand in the first half of 2021 will relatively stabilize because of the measures taken by OPEC+ in April 2020. The demand on oil in 2021 is estimated to be 98 million bpd. "Nevertheless, Saudi Arabia's unilateral decision to cut production by one million bpd in February and March can induce an uptake of crude prices to approach $60 per barrel as long as the value of dollar is still weak. That can be an incentive for corporates to back down on their decisions to halt their investments and development of oil fields. Hence, we can see drilling rigs going back to work," Rashed clarifies.

 

"The fall in oil prices definitely has a negative influence on petroleum companies' investments in exploration works. That is because the decline in revenues compared to the rise in fixed costs of drilling will require a larger number of years to recover the drilling's fixed costs," the economic expert points out.

  

"The value of shares of oil corporations dropped massively and to the half in some cases because of the fall in crude oil prices. Such decline had repercussions on those corporations' profits, and some of them endured losses making lay-offs necessary. The only chance those companies can make up for their losses is the rebound of oil prices on the medium and long run along with the rise in demand, and the decline in supply due to investment cuts," Rashed showcases.

 

"It is very possible that consolidations will happen willingly in the sector out of oil corporates' fear of bankruptcy and capital depletion as a consequence of accumulated losses, particularly if the duration of the pandemic gets longer. Out of crises, consolidations emerge as a way of circumventing financial collapse in any sector," the economics professor underlines.   

 

Roots of the Crisis and Collective Decisions

 

Reuters issued in August a report titled "The Future of Oil and Gas: A 2020 Market Report." The report began by explaining the reasons the demand on oil and gas decreased. One of the reasons is that a large share of demand is held by one country, which was the origin of the pandemic. The report indicates that in 2019, China was the largest importer of oil and gas as it accounted for more than 80% of global demand. Its crude imports in 2019 went up by 11% compared to 2018. China relied on imports to cover 75% of usage, and was stockpiling in time of pricing dips. Between 2003 and 2013, China's production of oil declined by 15% while its imports rose by 30% to record 10.12 million bpd.  

 

The demand also plummeted because of the suspension of work in large construction projects, lack of investment in infrastructure, and fall of electricity loads. Goldman Sachs estimated that as of close-March, global oil demand fell by 25%.

 

Early in March, the Organization of the Petroleum Exporting Countries (OPEC) and ten additional oil producing countries (OPEC+) wanted to cut global production by more than 15 million bpd over Q2. As such, Russia would have to reduce its production by 0.5 million bpd. Hence, it refused and oil prices dipped by 10%. In response, Saudi Arabia "introduced price discounts of between $6-8 per barrel to import customers across Europe, Asia and the US."

 

As a consequence, the West Texas Intermediate (WTI) dropped by 20%, and moved to negative territory on April 20 for the first time ever. Failure to halt production as a result of falling prices - and by consequence depletion of storage capacity - coupled with decreasing demand, led to -$37/bbl in April.

 

On April 12, OPEC+ decided the following quoting Reuters report:

 • Adjust downwards their overall crude oil production by 9.7 million bpd, starting on 1 May 2020, for an initial period of two months that concludes on 30 June 2020.

• For the subsequent period of 6 months, from 1 July 2020 to 31 December 2020, the total adjustment agreed will be 7.7 million bpd.

• It will be followed by a 5.8 million bpd adjustment for a period of 16 months, from 1 January 2021 to 30 April 2022.

• The baseline for the calculation of the adjustments is the oil production of October 2018, except for the Kingdom of Saudi Arabia and The Russian Federation, both with the same baseline level of 11.0 mb/d.

• The agreement will be valid until 30 April 2022, however, the extension of this agreement will be reviewed during December 2021.

 

By mid-May, prices hiked by 80% to be over $30 per barrel because of OPEC+ curtailments, a US campaign to reduce output by four million bpd, and a KSA initiative to decrease production by one million bpd. However, producers may increase production to benefit from rising prices in reducing deficits, the report estimates.

 

In December 2019, the price per barrel was $67.31. Later on, it kept slumping until it reached $18.38 in April. Since the following month, it has been recovering until it reached $48.52 in December 2020.

 

In the 2015 oil price crash, investments dropped by 40 percent but production increased because of the efficiencies carried out. On the contrary, the ongoing crisis is different.

 

"The 2020 crash will hit the upstream industry harder when CAPEX investment drops. Majors have already announced cuts in budgets somewhere around the 20% level, exceeding $80 billion across the sector by mid-April," the report indicates.  

 

"For producers, the easiest way to cut budgets is to not start projects, delaying that spend into the future. For sanctioned projects, companies will be looking at contracts and assess what can be cancelled. With contracts typically running lower costs of exiting, it will be projects under development that will be hit. For insight projects and oil producing assets, anything that is discretionary will likely be cut," the report showcases.