The oil and gas industry appeared to have weathered the storm of the 2015 price collapse and had responded with considerable accomplishments. By November 2017, domestic crude oil production reached its highest level in U.S. history.
International trade in crude oil and petroleum products was booming with exports of 6.6 million and imports of 10.3 million barrels per day in January 2018. New discoveries of substantial international offshore oil fields were being made.
And key energy think-tanks, oil trading companies and financial services companies, including the US Energy Information Administration (EIA) and Fitch Solutions were convinced that Brent crude oil prices could average US$61+ per barrel in 2020; seeing the year open with a price of roughly US$68 per barrel (Ross 2018; EIA 2020; Fitch 2020).
Then all of a sudden, boom! Things changed!!
Right from the beginning of the year 2020, international oil prices took a nose dive as a result of the spread of the Coronavirus, emanating from China and spreading to other parts of the world, and causing a massive slow down in economic activity across the globe. Imposition of travel restrictions, flight cancellation across the world, as well as close of shops and production outlets in and around China, collapsed the demand for oil and fuels.
The situation escalated when OPEC+ members failed to reach an agreement on production cuts in early March 2020, resulting in a price war between Russia and Saudi Arabia. Saudi Arabia the de facto leader of OPEC has since retaliated against Russia by announcing a huge discount on their crude price and promising to flood the oil market with cheap oil.
By the close of trading session on Friday March 6, global benchmark Brent had recorded over 30 percent drop from the beginning of the year, to sell at US$45.27 per barrel. And at the opening of trading on Monday March 9, Brent Crude tumbled by more than 30 percent following the lack of agreement on production cut.
On Friday March 20, the market gave back early gains by falling by more than 10 percent, even as the world’s richest nations poured unprecedented aid into the global economy to stop a coronavirus-driven recession and US President Donald Trump hinted of intervening in the price war between Saudi Arabia and Russia. US crude futures for April fell US$2.69, or 10.67 percent, to settle at US$22.53 per barrel. Brent crude futures fell US$1.25, or 4.4 percent, to trade at US$27.20 per barrel.
Brent closed at US$24.93 on Friday March 27, and by the next Monday morning at 0858hours, it had dropped further by approximately 9.1 percent to trade at US$22.65 per barrel. So cumulatively, the West Texas Intermediate (WTI) and Brent crudes have both collapsed by more than 49 percent in the past three weeks, since the breakdown of talks between OPEC and its allies.
The drop in price may have benefited some in terms of reduction in overall energy costs, rise in household and corporate real incomes, lowering of inflation and reduction in current account deficits for oil importing countries. But for oil exploration, production, and services companies, the impact is huge and negative in nature.
In the words of Gaurav Sharma of Forbes “the oil and gas industry’s pain always follows an oil price slump”.
According to the Analyst, it can be excruciatingly painful when it comes to market permutations in a cyclical business facing a once-in-a-generation event. In recent memory, the industry has either faced a demand crisis like the global financial crisis of 2008-09 or a supply glut that surfaced in 2015-16.
As the first quarter of 2020 nears its end, the industry is staring at simultaneous oversupply as well as a demand slump with many writing off much of 2020. With too much oil for too few takers, with too many producers vying for their attention; the situation is not just a crisis but an unmitigated disaster for exploration and production (E&P) companies and the oilfield services (OFS) firms that keep them going, according to Gaurav.
The oil and gas industry which consists of many firms have been rendered vulnerable in the sustained downturn in prices. Some of the players doesn’t have pockets which are as deep as those of major sovereigns like Russia and Saudi Arabia, whom they compete with in the oil market place, and the price these smaller players need to cover their costs is higher.
The low oil price environment has brought huge impact on operating performance of upstream oil and gas companies, as it impacts hugely on their cash flow. In the estimation of Wood Mackenzie, the oil industry could see US$380 billion in cash-flow vanish if Brent averages US$35 per barrel this year, relative to US$60. The cash flow constraint is reducing the ability of oil firms to invest in additional capital investment. The lower oil prices is reducing expected returns from future production, thus decreasing the incentives for upstream investment spending. This situation is resulting in a either delayed, suspended or cancelled new exploration and development projects. Dividend payments are being suspended, jobs are being lost, and the reduced investments in producing fields can ultimately slow the growth in production of the commodity.
In especially the United States and Canada, oil companies are announcing capital spending cuts, dividend cuts, and job losses by the hour as many of their operations are unsustainable and deep in the red at US$30 a barrel for WTI Crude. Also oil majors such as ExxonMobil, Chevron, Shell and BP are evaluating their capital expenditure (capex) and operating expenditures (opex), with multi-billion dollar projects likely to be in limbo.
OilPrice.com reports that Apache Corporation has announced slashing its 2020 capital investment plan to US$1.0 billion-US$1.2 billion from a previous range of US$1.6 billion-US$1.9 billion. Murphy Oil Corporation, though is maintaining its commitment to dividend payment, has slashed its capital expenditure plan for 2020 by 35 percent. Chevron, Husk Energy, and many others are also looking at reviewing their investment plans after the price collapse.
Occidental Petroleum, weighed down by debt after its US$38 billion acquisition of Anadarko, has announced that it is slashing its quarterly dividend to 11 cents a share from 79 cents. It also said it plans to rein in spending this year by about 32 percent to about US$3.6 billion.
On the oil fields services (OFS) side, blue chip Halliburton has said it would furlough about 3,500 employees in Houston, oil and gas capital of the U.S., for 60 days. Driller Payzone Directional Services is halting operations, Liberty Oilfield Services have indicated that its executives would take a 20 percent pay cut and so the story goes; underpinned by a wider belief in the industry that the year 2020 is a lost cause.
Tens of thousands are losing their jobs across Texas in places like the Permian Basin shale fields in west Texas as companies shut down their drilling rigs. While drilling Service Company Canary LLC has cut 43 jobs, Recoil Oilfield Services has proceeded to lay off 50 workers after the water-transfer company lost all of its work with shale giant EOG Resources Inc. The shrinking workforce is the direct result of a torrent of cuts in capital spending from U.S. explorers, some US$12.6 billion so far. All told, nearly two-thirds of the US$100 billion in global spending cuts could come in U.S. shale fields, according to Rystad Energy.
Worst to Come
Prices of crude are on track for their fifth weekly drop in a row as the Coronavirus ravages economies around the globe due to containment measures adopted by many countries. These steps have severely disrupted supply chain, and dramatically suppressed oil demand. Coupled with the lowered demand, is the price war initiated by Saudi Arabia few weeks ago which is flooding the oil market in the face of weaker demands.
According to a Senior Analyst at Oando, the lack of storage for crude present a major challenge to the already troubling market. In his estimation, roughly three-fourth of the world crude storage facilities are full. Reuters confirms that storage facilities both on land and offshore are already filling up, and Saudi Arabia has not yet started to increase its deliveries of crude.
The news agency reports that Saudi Arabia will maintain oil supply at 12.3 million barrels per day (bpd) over the next few months, with exports expecting to rise to a record 10 million bpd from next month.
Should Saudi Arabia and Russia follow through with their threats of unleashing record oil supply in the coming month, then the oil market will have to brace for another plunge in prices. The growing supply glut in oil markets could cause prices to tumble further if producers have nowhere to store the additional supplies, especially the oil Saudi Arabia may be churning out during the period of the price war.
Rystad Energy’s head of oil markets, Bjornar Tonhaugen is of the view that oil prices could slide as low as US$10 per barrel if such a scenario should unfold. He believes the world have not seen the worst of the price rout yet, as the market will soon come to realize that it may be facing one of the largest supply surpluses in modern oil market history.
Written by Paa Kwasi Anamua Sakyi (aka Nana Amoasi VII), Institute for Energy Security (IES) ©2019
The writer has over 23 years of experience in the technical and management areas of Oil and Gas Management, Banking and Finance, and Mechanical Engineering; working in both the Gold Mining and Oil sector. He is currently working as an Oil Trader, Consultant, and Policy Analyst in the global energy sector. He serves as a resource to many global energy research firms, including Argus Media and CNBC Africa