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Covid-19 impacts on Oil & Gas : Operators and Long Term PART 2

Covid-19 Reshapes Oil & Gas and Petrochemicals

If you have not read it yet, do not miss PART 1 of this article, covering short and mid term impacts.

In reaction to the social and economic roller coaster initiated by Covid-19, operators of the companies of the Oil & Gas and Petrochemical industry adapt their strategies.

Some delay projects, others speed them up to restore their market share at low cost.

These opposite strategies engaged by the different types of companies in response to the Covid-19 will reshape this sector for decades.

Operators strategies really depends on their profile:

  • International Oil Companies (IOC) : the majors, in blue, have been quick to react to this situation by announcing plans to cut cost and Capital Expenditures (CAPEX) by 20 to 30%.
    As they did in reaction to previous crises of 2008 and 2014, the IOCs are safeguarding their cash-flow and profitability during this harsh period, but in counter part they accept to lose market share.
    Thus, they represent less than 20% of the projects Capex to come on the next five years from the whole market upstream, midstream and downstream.
  • National Oil Companies (NOC) : as usual in similar crisis, most of the NOC, in red, maintain their CAPEX, they invest in counter-cycle.
    For many producing countries, these companies behave as central banks to keep running local economy and ensure social stability.
    In addition, such situation reduces the projects costs, paving them the way for increasing their market share at low price.
    Being already dominant in the market, they should exceed 60% of the whole projects Capex on the next two years.
  • Independent Companies (Independents) : mostly based in USA and UK, the Independents, in green, are highly exposed to the barrel price, the Covid-19 crisis came as a bowling ball in their plans.
    Many of them suffer from high level of debt and break-even.
    Numbers of them may disappear.
    Anyway, their assets will remain and should be consolidated at low price by other operators, mostly Independents too, but benefiting from lower break-even and level of debt.
    Over the years, these Independents have proven to be very resilient and to adapt to each crisis.
    Their current market share of 30% in projects Capex should remain stable.

In this context, the global market will mostly be driven by the NOC and the Independents, especially in natural gas, petrochemical and offshore projects.

Regarding the pending risk of a Covid-19 second wave in the mid-term, it should be mitigated geographically and timely, as we can already see it in Asia.

The Governments deploy “Stop & Go” policies, confining clusters as soon as they are detected and before they extend widely without paralyzing the whole country.

Long Term : The Rebirth

After the financial crisis in 2008, the first barrel price collapse in 2014, the Oil & Gas industry faces three crises at the same time:

  1. The Covid-19 affecting its daily operations and increasing costs
  2. The barrel price war impairing the revenues
  3. The climate change imposing to rethink companies foundations. 

In addition, these challenges are calling for response in urgent manner putting this very conservative industry in a situation to accept and manage drastic changes.

Regarding the impact of the Covid-19, the curve below how the confident policies had a first-time-seen effect on the oil consumption dropping in few days from approximately 100 million barrels per day (b/d) down to 70 million b/d in March 2020.

But in the same time we can notice how fast it turned up as soon as Government were releasing confinement.

At the speed it goes, the Energy Information Administration (EIA) anticipates that this consumption should recover 100 million b/d by the end of the year and should run again over that level in 2021.

If the demand is returning to previous levels, from production point of view the situation is a bit different as the companies revenues lost in 2020 will never be recovered.

In addition, the Oil & Gas and Petrochemical companies need to integrate all the constraints of the climate change requiring massive investments in carbon capture, usage and storage (CCUS), electrification and renewable energies.

This historical crisis shows how much “cash-is-king“, stressing the companies to cut not only the Capex, but also to reduce their Operational Expenditures (OPEX) drastically and on fast-track to overcome these challenges.

In this context, and as it was illustrated by the sudden expansion of the home office, innovation in organizations and processes is the only way to reach double digit costs reductions.

Accelerating the digitalization is key

Only the companies able to quickly implement their digital transition, we be able to jump over this triple crisis.

As we explained in previous post (Digitalization is now or never), Digitalization is offering a large scope of opportunities to help operators to save time and money.

From our experiences in different industries (Aerospace, Nuclear, Oil & Gas), the easiest and consistent way to implement the digital transition is to build it up around 8 blocks as defined in the picture below.

These 8 blocks require different solutions, involve different technologies, mobilize different competences, take different time frame, weight different costs.

They also need to comply with international standards to be connected to each other in the perspective of the extended enterprise.

Moving from the conventional business model to the extended entreprise is the journey required to change scale in value creation.

To undertake this journey, our Digital Roadmap combines the tool and processes, based on Industrie 4.0 principles, to identify most promising uses cases and industrialize them on fast-track in response to this historical crisis.

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