KUALA LUMPUR, Aug 31 — The oil and gas industry is experiencing its third price collapse in 12 years but after the first two shock, the industry rebounded and business continued as usual.
This time it is different as the current context combines a supply shock with an unprecedented drop in demand for the commodity and a global humanitarian crisis brought about by the COVID-19 pandemic.
Additionally, the sector’s financial and structural health is worse than in previous crises. The advent of shale, excessive supply, and generous financial markets that overlook the limited capital discipline have all contributed to poor returns.
Reflecting a devastating year for oil markets and the global economy at large as the world continues to battle the coronavirus pandemic, oil giant Saudi Aramco has reported a 50 per cent fall in net income to US$23.2 billion for the first half of the year from US$46.9 billion over the same period in 2019.
The Saudi Arabian oil company’s total free cash flow came in at US$21.1 billion for the first six months of the year, down from US$38 billion the year before.
Royal Dutch Shell has also reported a deep financial loss after a record writedown on the value of its oil and gas assets due to the collapse in global market prices triggered by COVID-19.
The Anglo-Dutch oil giant revealed a net loss of US$18.3 billion for the second quarter of 2020, down sharply from a net profit of US$3 billion over the same period and US$2.7 billion in the first three months of 2020.
Meanwhile, BP slashed its dividend payout by 50 per cent to 5.25 cents per share, which was larger than the 40 per cent forecast by analysts and appeared inevitable given a large debt pile, the collapse in oil and gas demand as well as growing expectations for a sluggish global economic recovery.
Given the sluggish financial performance, all eyes now are on Malaysia’s national oil company Petronas, which is set to announce its second-quarter financial performance on Sept 4.
Asia School of Business (ASB) assistant professor of business and society Dr Renato Oliveira de Lima said to some extent, oil companies have shown to be more resilient now than after the fall of oil prices in 2014 as some had already incorporated the scenario of “lower for longer”.
The oil company also avoided reaching final investment decisions in areas that would only break-even at high oil prices, he added.
“While many managed to sustain their business, the focus shifted decisively to preserve cash. Cost-cutting, particularly new investments in exploration and production, has been across the board, but bankruptcies so far have been limited mostly to U.S. producers that have assets in areas with a high cost of production,” he told Bernama.
To mitigate the impact of weak oil markets, international oil companies, indigenous oil and gas as well as chemicals companies are responding by cutting capital and operational expenditures, which will filter down to suppliers and oil servicing companies.
In May this year, Petronas announced that it is slashing its capital expenditure for the financial year ending Dec 31, 2020 by 21 per cent from its initial estimate of around RM50 billion, as it faces challenges driven by the pandemic outbreak.
de Oliveira said the crisis for the oil industry is not over and there are short- and long-term reasons, including the rising COVID-19 cases globally.
“More likely, it will take two years for confidence in travelling to pick up again, with widespread vaccines and travel restrictions lifted. Demand, then, may return to 100 million barrels per day as we had at the beginning of the year,” he added.
de Oliveira said the current scenario could turn out to be a permanent shock to the oil industry, reducing its growth potential, traditionally closely linked to the growth of economic activity.
“Concurrently, renewables continue to be more competitive with cost reduction in generation and electric vehicles increasing their market share. Together, these factors may result in a very competitive oil market, with lower margins of operation,” he pointed out.
Meanwhile, AxiCorp chief global markets strategist Stephen Innes said for the oil sector, investor preference for green energy has hurt oil and gas capital investments so there is less money for exploration.
“This is more evident in US shale where very few new wells are getting drilled. The halcyon days for the oil industry are but a distant memory,” he told Bernama.
Innes expects oil prices to remain tethered to current ranges through 2020 as COVID-19 concerns will weigh on demand.
“But even if economic activity increases faster than expected and prices start to rise, more US shale shut-ins will come back online and OPEC + will add more barrels to the market as they don’t want prices to rise so that shale producers will be encouraged to produce more barrels,” he added.
ASB’s de Oliveira said a fundamental change is inevitable as the oil and gas industry has already reached peak consumption and renewables will grow even faster going forward.
“If that is so, diversification becomes an even bigger imperative, not only for companies to find new market opportunities, but also for governments currently heavily reliant on oil revenues,” he added.