By Saad al-Kuwari
The combination of disruptive Covid-19 epidemic demand and oversupply has created an unprecedented crisis for the global oil and gas industry.
The oil and gas industry is experiencing its third price collapse in a span of 12 years.
After the first two shocks, the industry rebounded, business continued as usual, but this time it is clearly different.
The current context combines an unprecedented supply shock and reduced demand with a global humanitarian crisis.
Short-term scenarios for supply, demand and prices:
Under better scenarios, oil prices could recover in 2021 or 2022 to pre-crisis levels from $50 a barrel to $60 a barrel. Crude oil price differentials during this period are also likely to present challenges and opportunities.
The industry may also benefit from modest temporary price hikes, as the massive drop in investment today results in an immediate shortage of tomorrow.
In two other scenarios we have modelled for, these price levels may not be reached until 2024. Oil prices may not return to past levels. However, oil is going through some difficult times in the next few years.
Liquefied natural gas and its prices: Regional gas prices could fall much lower than in the previous mega-cycle.
Shale gas unleashed abundant gas resources at costs equivalent to less than $2.5 / MMBtu to $3.0 / MMBtu and the pandemic had an immediate impact, reducing gas demand by 5 to 10% against pre-crisis growth expectations.
With North America becoming one of the largest exporters of liquefied natural gas by early 2020, and the LNG market being sharply increasing supply, regional gas prices in Europe and Asia will be driven by prices at Henry Hub, plus the cash costs of transportation and liquefaction (a premium of approximately $1 / MMBtu to $2 / MMBtu).
Refined oil derivatives: The demand for refined products has fallen by at least 20%, and refining has plunged into a crisis. We think it will take at least two years before demand recovers, with the outlook for jet fuel particularly bleak.
The immediate effects are truly staggering: companies must know how to operate safely as infections spread and how to handle full storage, with prices dropping below the cash costs of some operators.
Long-term challenges: Looking beyond today's crisis in the late 2000s, the macro environment is set to become more difficult. Here, start with supply and demand. The demand for hydrocarbons, especially oil, is expected to reach its peak in the 1930s, and then begin to decline slowly.
Excess capacity in refining will be exposed, putting downward pressure on profits – driven by marginal pricing, and in some cases outside the growing demand markets – outside of the Organisation for Economic Co-operation and Development, by the economies of some refiners seeking to avoid the high cost of closing assets.
As for geopolitical risks that will continue to be a major factor affecting supply, new sources of low-cost and short-cycle supplies will reduce the breadth and duration of price increases.
However, the affected oil and shale gas sub-sector will continue to provide supplies that can be delivered quickly. Its resilience may improve even as bigger and stronger players consolidate the sector, and reduced demand, driven by the energy shift and increased global supply will make the job of Opec and Opec+ harder, not easier.
Global gas and LNG will have a positive role in the energy transition, ensuring a place in the future energy mix, supported by continued demand growth in the next decade.
However, in LNG, the expected and potential cyclic expansion over the decade will lead to increased pressure and volatility on prices. Global LNG contracts, and hence to regional gas prices.
In the long-term (post 2035), gas will face the same pressures as oil with peak demand and the additional economy driving the decision-making process.
The challenge of the energy transition will continue today, and governments are focusing intently on managing the Covid-19 pandemic and mitigating the impacts on economies, distracting attention from the energy transition.
However, the climate and environment debate is unlikely to disappear. The innovation that has lowered the costs of wind power, solar power and batteries will continue and decarbonise will remain essential to the industry.
The negative public sentiment and investor / lender pressure the industry has endured in the past may turn out to be moderate compared to the future. The energy transition and decarbonisation may be accelerated by the current crisis.
An increasing number of investors are wondering whether the current oil and gas companies will achieve acceptable returns. Its role in energy transmission is also uncertain.
Therefore, oil and gas companies must demonstrate their ability to master this field, and discipline in finance, capital allocation, risk management and governance will be crucial in the current circumstances.
Saad Abdulla al-Kuwari graduated in Chemical Engineering from Qatar University and obtained an MBA in Oil & Gas from Liverpool University. He was appointed CEO of Tasweeq in 2010. During his career, he has occupied several key positions in refining projects and processing, oil, gas and refined products, storage tanks and export terminals operation. He also has considerable experience in the field of Gas Processing Operations. He was also manager of Gas, Oil Petrochemical Marketing in QP Marketing Directorate for several years.
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