The Last Barrel

Oh, my goodness! It baffles my sensibilities to recount all the dire predictions by executives and consulting firms about the long-term effects of Covid-19 on the industry. The unrelenting onslaught of “we will never recover” or “nothing will ever be the same” seems short-sighted and does not take into account the role that oil and gas play in driving our economy and perpetuating our way of life. Let’s take a look at some of the more pointed forecasts and results of weak demand on the industry.

Demand growth will never recover. In July, Citigroup analysts forecasted that demand growth for refined oil products will never return to the levels it reached before the coronavirus outbreak. “As the global economy restarts, fewer people will fly and use their cars,” analysts, including Ed Morse, wrote in a report. “With meetings going virtual, and business no longer needing to move employees around the world in the same way as before, there will be powerful forces pushing a transition away from oil.

At its peak, the virus wiped out up to 30% of total oil demand, and the market is still recovering. Citi said that oil is more likely to be at $45/bbl, rather than $60/bbl, in the long-term. But “oil product demand growth will falter significantly, change its contours and never return to pre-Covid-19 rates of growth.” With its more pessimistic take on demand, Citi also forecasted that oil price would most likely remain lower than anticipated, with longer-term supply costs falling and ample production capacity still offline.

Weak demand causes record write-down. Royal Dutch Shell wrote down between $15 billion and $22 billion in the second quarter, as the company gave investors insight about how severely the coronavirus crisis has hit their oil and gas business. The impairment is the firm’s largest since Royal Dutch Petroleum and Shell Transport & Trading merged in 1907. The loss forced the company to cut its dividend for the first time since World War II. 

Shell also said that its upstream unit suffered a loss in the second quarter and will take an impairment charge of $4 billion to $6 billion, mostly from North American shale and its Brazilian assets. Shell’s large LNG business, which is central to its vision of the future of energy, took the biggest hit. However, for the longer term, Shell is optimistic about the LNG market, with CEO Ben van Beurden saying that he expects consumption to recover to pre-virus levels, once the economy gets back on track.

BP to change business model. Since the precipitous drop in demand that started in March, BP has indicated that it intends to make drastic changes to its business. CEO Bernard Looney explained that these moves are a response to the dual threats of the lockdown-induced slump and the growing pressure to cut carbon emissions. The company also anticipates oil and gas prices to remain lower than expected in the coming decades, as the virus hurts long-term demand and accelerates the shift to cleaner energy. BP Chairman Helge Lund said the company would slash oil and gas production, and spend billions on clean energy. “Energy markets have begun a process of fundamental lasting change, shifting increasingly towards low carbon and renewables.” Over the longer term, the demand for both oil and gas will be increasingly challenged, Lund concluded.

Oilfield service sector. Baker Hughes has joined the majors in making structural changes to adjust for the demand disruption. Although the company said that worldwide economic contraction probably bottomed in the second quarter, it warned that the outlook remains “extremely limited.” CEO Lorenzo Simonelli said “we are on track to hit our goals of structurally right-sizing our business and achieving the $700 million in annualized cost-savings by year-end. We remain committed to our strategy, maintaining our focus on higher-margin and differentiated portfolio offerings, and providing our customers with leading technologies to support the energy transition.” 

Schlumberger posted its weakest sales in 14 years and cut approximately 21,000 jobs (20% of workforce) while warning that new waves of Covid-19 could derail the emerging recovery in demand. The second-quarter rout was so severe, the company spent $1 billion on job severance, in a move that will reduce staffing to an 11-year low. Various other impairment charges cost the company another $2.7 billion. Despite disastrous results in some business lines—North American onshore fracing sales tumbled 60%—the company managed to shield the $0.125/share dividend from additional reductions. 

Recovery taking hold. After posting the worst quarter on record, oil had its best three months in 30 years, as it bounced back from the historic crash. Crude futures doubled in value during the second quarter, buoyed by large production cuts by OPEC and Russia. In another positive for oil markets, China’s recovery is continuing, with manufacturing data beating estimates, pointing to stronger demand from the world’s largest consumer. “The worst is behind us,” said Saudi Aramco CEO Amin Nasser. “I’m very optimistic about the second half of this year. We see recovery taking hold in China, with demand at 90% of pre-virus levels.”

Just another bust cycle. Although this latest downturn is more drastic then previous events, in reality, it’s just another bust cycle. And once we defeat Covid-19, consumption and demand growth will slowly return to pre-event levels. And while the media’s 24/7 coverage has elevated the pandemic to biblical proportions, let’s remember science has defeated, or severely limited, the effects of Polio, Ebola, Rabies, Smallpox, SARS and HIV, just to name a few. Although it’s understandable that companies with limited reserves are jumping on the “energy transition bandwagon,” let’s remember that hydrocarbons still drive our economy and are delivering the cost-effective energy that we require to get us through this difficult situation.

About the Authors

Craig Fleming

World Oil

Craig Fleming Craig.Fleming@WorldOil.com