Oil & Gas: An Eventful Few Months
We are more than halfway through the year 2020: and what a strange, unpredictable and eventful ride it has been!
Since Covid-19 hit the world, and thus the oil and gas industry, we seem to have been achieving many records - but not the sort that were part of any company’s key performance indicators or five year plan. At just 4.9 Bboe in the first six months of 2020, global discoveries of conventional resources were the lowest half year of the 21st century, while the number of discoveries was down by 31% compared to the same period in 2019, according to Rystad Energy.
The International Energy Agency (IEA)’s forecast in early February predicted that global oil demand would grow by 825,000 bopd in 2020; instead, it fell by 10.75 MMbopd in the first half of the year. Meanwhile the Covid-19 crisis coupled with an unusually mild winter in the northern hemisphere have resulted in an anticipated 4% drop in demand for natural gas through 2020, the largest annual decline in history.
This unlooked-for record-setting was also seen in the supply side, with, for example, US crude oil production plummeting 2 MMbopd in May, the steepest monthly decline on record since 2005. On top of record output cuts from OPEC+ in May and June, oil production from other non-OPEC producers has fallen by 4.5 MMbopd since the start of the year. Overall, the IEA estimates that global oil supply will decline by a 7.2 MMbopd on average in 2020, and only increase by 1.8 MMbopd in 2021, assuming 100% compliance with OPEC+ cuts. That often-used industry bellwether, the US rig count, dropped for 20 weeks in a row from mid-March, down 60% to 251 units - the lowest since rig counts began in 1987.
Unsurprisingly, hitting all these supply and demand records has been very disruptive throughout the oil and gas industry, with many companies reporting huge downturns and losses as well as some bankruptcies. Spending is being cut and investment decisions postponed to make up for the significant shortfall in revenue, with global investment in the industry expected to fall by at least a fifth in 2020 (IEA), in an already poor market where investor confidence and access to capital were in short supply.
Turning a Corner?
There are signs, however, we might be turning a corner. That rig count, for example, has finally stopped dropping, and demand has begun to rise in many parts of the world as lockdown restrictions have been eased and people have begun to travel more - although, with Covid-19 infections still rising globally and expectations of further waves of the disease, a significant rise in demand to pre-pandemic levels cannot be expected this year at least. The IEA, for example, sounded a note of mild optimism when it said: “If recent trends in production are maintained and demand does recover, the market will be on a more stable footing by the end of the second half.” The US Energy Information Administration (EIA) is more optimistic, looking at a V-shaped recovery (see Oil Crisis 2020: Prospects for the Near Future). It predicts that global consumption of liquid fuels will average 92.9 MMobpd, down 8.1 MMbopd from 2019.
Oil prices seem to be holding steady, even though they are down considerably on levels seen at the start of the year. OPEC+ production cuts are due to be wound back if demand continues to make modest increases, but if there are no unexpected production surges, it is thought these prices could remain steady - barring any major geopolitical upheavals, which certainly cannot be discounted.
Looking longer term, if investment in exploration remains low, it is thought that by the middle of this decade, assuming demand reverts to pre-pandemic increment levels, there could be a serious supply crisis, assuming alternative energy sources will have not been developed sufficiently to fill the gap. So good news for the explorers of 2025 – but hard times for many until then.
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