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Barrel Price and Covid-19 Impact on Oil & Gas and PetroChemicals Projects

Crude Oil Barrel Price is Back to Normal

All crises are creating threats and opportunities, but the accumulation of a double crisis in energy prices and pandemic Covid-19 generates a unique situation.

In this unusual context, we try to evaluate the consequences of this double crisis on the Oil & Gas and Petrochemical market, especially the areas under threats and in opposite way where we should see opportunities.

This analysis is not intended to be based on assumptions and hypothetical speculations, but referring to historical facts and figures and the fundamental trends driving the market for decades.

Best example is the crude oil barrel price as illustrated in the curve here below showing these prices over a long period, from 1861 to 2014.

Oil Barrel Price History by BPIf the daily fluctuations of the oil prices generate a lot of emotions to some financial agents, this picture provides us with interesting information.

First, it illustrates how politics and economies drive the barrel price and not the opposite.

Second, it reminds us that the historical crude oil price is ranging around $20 to $30 per barrel.

Therefore, the current situation is bringing us back to the historical average crude oil price.

Exploration and Production are Disconnected

Each time the crude oil price is collapsing, the media report cascade of bad news about companies firing people and projects being postponed or cancelled.

For example, Halliburton announced this week 3000 new layoffs.

When the crude oil price goes up, the same media report again cascade of bad news, so where is the logic ?

The logic relies in the fact that exploration and production are disconnected at global level and react in different ways when the barrel price goes up and down, generating damages for some companies on one hand, but also helping other companies on the other hand.

In that respect, it is correct that each barrel price slip has a direct impact on the exploration activities.

But when it comes to the crude oil production the situation is rather different as illustrated by the picture here below.

Oil Production per Day 2009 to 2016

This graph shows how the crude oil production in the world has continued to increase after the financial crisis in 2008 and the barrel price collapse in 2014.

Since 2016, this production has continued on the same trend to reach nearly the historical cap of 100 million barrels per day.

In this period we can notice that even when the demand came down, the production has continued to grow, increasing the stocks in the same time.

If we compare with gas, we can notice that for decades the gas prices were very low and most of this gas was massively flared for that reason, anyway the investments have continuously increased to monetize gas because of the demand in electricity and petrochemicals.

In the same way as the gas price is not the driver of the investment in gas, the crude oil prices and corresponding capital expenditure are primarily driven by the value to be created out of these resources.

With crude oil prices running down, the petrochemical projects become even more profitable, opening projects opportunities in producing countries as well as as in consuming countries.

Oil Production War to Fuel Projects Investments

In its March 2020 Outlook, the International Energy Agency (IEA) is forecasting, as a worst case scenario, a decline of the demand down to 90 million barrels per day in 2020 in consequence of the Covid-19, but this drop on the short term demand should not have any impact on the production as IEA confirms in the same time that the production should continue to grow by 5.9 million barrel per day between 2019 and 2025 in response to a sustainable downstream demand.

This IEA forecast is in line with previous crisis showing how the barrel price collapses have a severe impact on the exploration, but not on the global production.

The picture below is illustrating a part of the explanation to this apparent paradox.

OPEC Market Share

The blue curve represents the OPEC market share over 50 years in the global production, it shows that since the oil price came down to $12 per barrel in the 2000s years, OPEC has decided to maintain a minimum of 40% market share to keep regulating the market.

But since 2013, the market has drastically evolved with Russia and USA contesting Saudi Arabia world production leadership and forcing the Middle East countries to reduce their production to maintain a barrel price above $40 per barrel, thus to reduce OPEC market share downward to the limit of 30%, below which this organization considers to lose the control of the market.

At the default to align strategies between OPEC and non-OPEC countries, especially Russia, the Kingdom of Saudi Arabia, well supported by the other Gulf countries have decided to go bullish in the oil production and aggressive pricing.

In addition to boost capacities by about 4 million barrels per day in a short term, Saudi Arabia has confirmed to maintain its $100 billion investment in one field development with the target to come back as close as possible to the 40% market share with the support of the other OPEC countries.

Middle-East is the perfect example of region which has never reduced Oil & Gas and Petrochemical investments in case of downturn, but instead which has mobilized their National Oil Companies (NOCs) to support the resilience of their local economies and employment.

Not all Companies are Equal : Winners and Weakers

USA, Middle-East and Russia examples reflect how much the countries and even more the companies react in such context of tension on production and price war.

The picture below represents the investments in Oil & Gas and Petrochemical projects in respect with the profile of the operator – International Oil Companies (IOCs) –  National Oil Companies (NOCs)Independent Companies (Independents) on the period 2020 to 2025.
Market split per Operator (IOC- NOC - Independent) March 2020

The table consolidates the capital expenditure (Capex) of 917 projects above $100 million Capex each, so the average size of these projects is about $2.8 billion each.

In the picture, the IOCs are in blue and represent 18%, the NOCs in red dominate with 55% and the Independents in green weight 27%.

Since 2014, the latest oil price drop, the blue part corresponding to the IOCs has reduced by 50% while the red part, about the NOCs, and the green part for the Independents have increased by 10 to 15% year to year.

With a new dip in oil price, the projects operated by the IOCs may suffer again to be postponed, but are already marginal (18%) as today most of the IOCs activities are related to NOCs operated projects.

For the NOCs the situation is far different as these companies do not react according to the stock exchange but behave as the Central Bank of their respective local economy.

They may adjust their investment policy from year to year, especially between upstream and downstream but overall they maintain their investments to keep the country afloat whatever are the fluctuations of the barrel price.

In producing countries, the investments may be cut for infrastructures, real estate, entertainment, but the tape for oil and gas production and their monetization must stay open.

In this competition, the companies with the largest capacities and lowest costs will lead the price war, meaning that NOCs and Independents will continue to increase their market share to 85% or 90%.

Regarding the Independents, all profiles of companies do exist with some generating excellent cash-flow based on long term agreements and low costs, and others struggling with debts and costs, especially in the unconventional oil and gas.

These Independent companies should go through a period of consolidation, leaving some projects on hold for one year, but they have proven in the past to be the first ones to rebound.

So, overall this combination of the price war with the Covid-19 should leave the leaders, typically the NOCs and about half of the Independents, much stronger, while the other companies will need to adapt.

Even if 30% of the projects are Postponed or Cancelled, Overall Production and Investments will still Increase

At the end, the same question still remains about the impact of the barrel price and Covid-19 on the Oil & Gas and Petrochemical market for all the engineering companies, contractors, original equipment manufacturers (OEMs) and services providers.

On January 2020, we published this barre graph representing the investment in Oil & Gas and Petrochemical projects above $100 million capital expenditure each we have identified with our database on the period 2015 to 2025.

Oil&Gas and Petrochemicals Capital Expenditure Project Smart Explorer January 1st 2020

This diagram is showing a regular increase from 2015 to 2019, then it takes a leap on the period 2020 to 2024.

The downhill on the years 2023 and following is not reflecting any market down turn, but the vision we have on projects for this period, the further we look, the less we see.

At the beginning of this year, it was already clear that such forecast of 50% increase had no chance to happen as the engineering companies and contractors, already well loaded, had no capacity left to absorb such abrupt increase in project investments from 2019 to following years.

Therefore, it was already clear months ago that quantities of projects should be postponed or cancelled for whatever reasons, at that time we could expect due to too high costs.

Today, the oil price and production war combined with the Covid-19 may generate an avalanche of postponed or cancelled projects but no more than previously identified even if reasons have changed.

In addition a part of them will be balanced by other projects to increase production upstream and downstream in Middle-East and Asia.

All together, these cancellations should exceed 30% of the market in 2020, to have a downturn impact on the market.

Such scenario would suppose for example that all the IOCs would turn down to zero their capital expenditure during 12 months.

This situation is unlikely to happen in a context expecting 5% production growth by 2025 compared with 2020.

In summary, the Covid-19 will have an obvious impact on daily operations, the sooner it will be contained the better, but overall the global demand is still there and expected to grow.

In this context, the oil price and production war will be devastating for the most exposed companies mentioned above.

But, the market shift we observed in 2014 from the IOCs to the NOCs should continue in the same way offering the support to a solid market for the coming months and years. 

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6 Comments to “Barrel Price and Covid-19 Impact on Oil & Gas and PetroChemicals Projects”

  1. Chers Amis
    Je vais prendre le temps dans mon confinement d’Orléans pour lire tout cela.
    La première partie sur la “crise” me convient parfaitement, j’en ai connu des “crises” du pétrole et le monde pétrolier continue, mais pas pour tous en même temps.
    Mais vous commencez la courbe en 1861, c’est pas sympa pour moi.
    J’aimerais avoir les quarante dernières années pour les relier à mes activités…
    Même offre que d’habitude : si vous souhaitez une diffusion d’un article, d’un texte spécifique, je vous fais cela !
    Vous le faites passez le morceau tout prêt.

    Confinés donc, nous ne pouvons repartir à Abu Dhabi, le télétravail et les télé contacts ne sont pas aussi pertinents. Nous verrons pendant RAMADAN…

    Bien amicalement à tous
    Jean-Jacques et Sylvie ROYANT

    • Bonjour Jean-Jacques,
      Ravi d’apprendre que vous êtes bien chez vous et pas confinés dans un aéroport.
      Pour ce qui est de l’article, je te laisse juger de la pertinence qui pourrait avoir auprès de tes clients. N’hésites pas à le partager, tes relais sont toujours appréciés.
      Concernant tes activités, un graphique intéressant est le prix moyen du baril par année que tu peux trouver sur la page en cliquant ici.

  2. Dear Jean-Charles,
    This is a most timely and very useful set of information, based on historical analysis, which brings a new perspective on the current global oil & gas industry situation. It serves to provide us with factually based observations which can assist us in influencing our strategic directions both in the short and medium terms.
    Well done !
    Kind Regards

    • Many thanks Ross

      Coming from someone as you who has also gone through previous crisis in this industry, your comment is very valuable and much appreciated.
      We try to help our clients and followers as best as we can, especially when lucky enough to belong to a well resilient sector.
      Keep you and your relatives safe and we’ll celebrate the rebound together.
      Best regards

  3. Dear Jean-Charles,

    Very interesting article and fact based. I agree we should not overreact in panic but act based on lessons learned of past down turns. Keep our head cool based on covid-19 and prioritize the right projects. Your article is a great fact based update on current situation. Looking forward to next articles.

    Stay healthy! Kind regards Xavier.

    • Many thanks Xavier
      Keep rolling and preserve yourself.
      Best regards

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