Dynamics of Oil & Gas Industry - A New Cycle Awaits Oil Price Revival

Dr. Salman Ghouri


The world would soon bounce back from this pandemic, albeit the recovery would be rough and painful. The current regime of lower oil prices may not last forever. In fact, it may rebound due to the dynamic nature of oil and gas industry.

The exploration and production activities are mainly driven by the current and future expectations of oil prices, availability of resources and other important drivers. History informs us that higher oil prices led to phenomenal investments in upstream operations and vice versa. Going back to the recent past, persistently lower oil prices during 2014/2016 led to underinvestment in upstream and less FIDs finalized in exploration and development activities. Investments in upstream for example, plunged from $1079 billion in 2014 to $900 billion in 2015 and then further down to $583 billion in 2016. Why? Lower oil prices severely affected oil and gas companies’ revenues, cashflows, and profitability. Therefore, less resources were available for future investment in exploration and production activities.

The question is what will happen to the oil and gas industry post-COVID-19? Should we expect the regime of lower oil prices linger or the revival of oil prices? 

No doubt COVID-19 has devastated the global economies. The economic, social, and mental damage caused by COVID across the world may take years to bring us back to pre-COVID environment.

The partial and complete shut-down for months not only severely impacted the small, medium to large scale businesses but also resulted in high unemployment with many more at risk of losing jobs. For example, U.S Labor Department reported that total nonfarm payroll employment fell by 20.5 million in April, and the unemployment rate increased by 10.3 percentage points to 14.7 percent. This is the highest rate and the largest over-the-month increase since January 1948. The changes in these measures reflect the effects of the COVID-19 and efforts to contain it. Employment fell sharply in all major industry sectors, with particularly heavy job losses in leisure and hospitality.

While at a global level, the International Labor Organization (ILO), reported that some 1.6 billion workers in the informal economy, representing nearly half of the global labor force are in immediate danger of losing their livelihoods due to the COVID pandemic. Aviation industry is however, one of the worst-hit. World air traffic suffered a massive drop of more than half in March 2020, compared with the same period last year. The stories of other industries are no different, all having suffered. It is too early to determine the extent of damages that so far has occurred on the remaining industries.

The oil industry is yet another front-line sector that is severely affected. The lower oil and gas prices over the past few months not only resulted in high unemployment (the U.S. Labor Department reported that unemployment in mining, quarrying, and oil and gas extraction rose from 1.9% in January to 10.2% in April 2020.) but also significantly reduced companies’ revenues, profit, and cashflows. As such, most of major, independent as well as NOCs already incurred huge losses. For example, Occidental Petroleum Corp. reported a net loss of $2.2 billion, BP  reported $4.4-billion net loss in the 1^st quarter, ExxonMobil reported estimated first quarter loss of $610 million and also announced 30% cut in its capex for 2020 to $23 billion, compared to $33 billion earlier announced. Italian oil and gas company Eni SpA (E) reported its first-quarter net loss was 2.93 billion euros, compared to net profit of 1.09 billion euros a year ago.

While many will go out of businesses as they cannot withstand losses due to significantly lower prices – that falls below their break-even level.

A research conducted by Rystad Energy, estimated that E&P companies’ revenues are set to plunge by around $1 trillion in 2020, as compared to $2.47 trillion last year. They were also of the view that 2020 might be the year marked by the lowest project sanctioning activity since 1950s in terms of total sanctioned investments, which stands at $110 billion – only 33% compared to 2019. As such, many companies have already abandoned or deferred their major projects.

What does it all mean? It simply means that less resources are available for future investments in exploration and production (E&P) - hindering companies’ future investment’s ability. That is, subsequently inadequate resources would affect the supply side which is now in surplus.

The world in post-COVID-19 recovery phase would be needing enormous financial and energy resources to rectify the damages caused by COVID-19. During this recovery process, global oil demand slowly moves towards normalcy and may over-shoot supplies. As less resources at oil industry disposal to enhance production (at least in the short run). Furthermore, there is always a lag involved, i.e., there is no magic switch to turn on and off. It takes number of years in developing prospects, acquiring lease, seismic data acquisition & processing and drilling exploratory wells. In addition, shale oil wells that were forced to shut-down may not be able to produce the pre-shut-in level. In fact, less production but with an additional cost. COVID-19 may have also disrupted the manufacturing sites (where plants & equipment for future delivery are under construction) that might delay the project’s completion date. The list goes on and all of these surely would impact the supply side.

The world has witnessed various cycles in the past. Yet the current cycle is deep and rough as it is accompanied with COVID and excess supplies. The oil and gas industry faced with double dip dilemma. COVID on one hand, impaired global oil demand while excess supplies caused by OPEC’s strategy further exacerbated the problem – causing oil prices to plunge below $20/bbl. The time-scale of oil price recovery depends how quickly global economy revives; how fast surplus oil is consumed due to increase in demand and strict compliance of OPEC- plus to agreed production quota.

Whatever the time-scale may be, a new cycle awaits and the world would soon witness increasing trends in oil prices till a new equilibrium is restored, albeit at a higher price.