MANY economies and industries have experienced severe disruption due to the current global health crisis — and the oil industry, which has a direct impact on the global market, has suffered far-reaching and long-lasting damage. This is in part due to the lockdowns enforced by many countries in the name of safety, putting a halt on non-essential travel and crippling the supply chain.
In fact, the Paris-based IEA predicts that oil and gas exploration companies are set to lose $1.5 trillion in revenues this year, with many national oil companies now short of money.
To paint a better picture of what the future of the oil industry might look like, it’s crucial to first have an understanding of where it was at the advent of COVID-19. Before the world went into lockdown, OPEC+ countries were negotiating a price cut, despite being aware that COVID-19 could impact demand. Russia, the third largest producer of oil, had walked out on these negotiations and this had prompted Saudi Arabia to undercut oil prices by at least $11 per barrel.
Despite travel restrictions and closed economies affecting the demand for energy, oil producers still continued to pump at will. This then led to a massive price crash that subsequently negatively influenced a number of sectors that pull foreign direct investments — namely the plastic, chemical, and automotive industries. Oil prices sunk below zero, with the price of WTI crude oil futures, one of the three benchmarks of oil pricing, closing at negative $52 last April.
With extremely low prices and the sheer amount of product supply they have on their hands, oil producers have been overwhelmed, and many willingly asked traders to collect and store the commodity. However, this solution created problems of its own, as the world’s oil storage capacity has also been reaching record numbers: almost 160 million barrels of oil are now being stored in sea tankers. The price of renting a supertanker has therefore also increased to almost $400,000 per day, according to Reuters.
With all that in mind, it’s clear that the oil industry has really felt the brunt of this pandemic, with producers, service providers, fleet companies, storage solution providers, marketers, and traders experiencing delayed or cancelled activity. Even oil juggernauts like Shell and BP have been forced to reduce their on-site workforce to comply with health and safety protocols. All of this has then culminated into limiting the supply chain and compelling import-export terminals to operate at minimum capacity.
And unless the global demand starts to pick up, the future of the oil industry remains bleak. Saying that the pandemic has devastated so many countries and industries is an understatement. FXCM highlights the enormity of its effects on the global economy, which is set to be the worst on record since 1870. There is no certainty as to how long these difficulties will last, as many countries are experiencing numerous waves of the virus — constantly eliciting lockdown orders and travel restrictions that have made it impossible for industries and countries to achieve a steady recovery. Many industries and societies have relied on oil since the late 19th century, and the constant depreciation of its value in today’s market will further disrupt key sectors too.
Though we can’t say for sure how the oil industry will look like in a post-pandemic world, we can look to key events to faintly see its future state. For one, wells all over the world have been shutting down, and fields in U.S. states of Oklahoma and North Dakota have been forced to close as instances of non-receipt continues to happen. In Russia, oil companies have resorted to burning their oil stock to tackle the market glut. The slump in the market has forced the hands of all oil producers, and both governments and companies have begun shutting down their output, as seen in what OPEC+ member Azerbaijan has done.
While the current state of the oil industry is now slowly looking up — with IEA’s June 2020 Market Report pointing out that demand will be at 500,000 barrels per day more compared to May numbers — it’ll still take at least 18 months before demand returns to normal. Oil companies should then take this time as an opportunity to evaluate the current state of capital planning and project management processes. This can open near-term opportunities to address upgrades to existing assets while keeping supply intact. InEight’s chief product officer, Brad Barth, notes that by staying on top of project controls, oil companies can better weather times of uncertainty.
The measures enforced by numerous countries and industry players might lessen the damages inflected by these tough times to the oil industry, but it’s still a long way to go before we can truly say that the industry is recovering. Only once economies are restarted and lockdowns are indefinitely lifted will we see the oil industry return to normal numbers, and time will only tell when that will happen as there is still a huge amount of uncertainty when it comes to deploying a foolproof solution to the COVID-19 pandemic.
exclusively written for oilandgasaustralia.com.au By Brenda Saw