COVID-19: Global operational impacts on the oil industry

Way ahead for the oil and Gas operations

After the crisis subsides, there will be major changes in the way the industry will function. Oil Majors will reduce redundant manpower and delay new CAPEX intensive Projects until they become economically viable, due to changing technology. They may revisit CAPEX and development concept.

•   OPEC and Middle East will shed manpower and delay large CAPEX projects while bringing forward low-cost projects to be able to retain future market share. The reason behind such measures is that the OPEC quotas are based on production capacity and everyone wants to gain / retain market share. Most of the companies have already retrenched expensive expatriate manpower in the last few years. Hence very little change is expected in the response of these companies.

•   In the oil importing nations (India, China etc.), the pace of projects will slowly speed up to make use of the reduced CAPEX of projects. The cost of services usually reduces significantly during the time of low oil prices – however, the profit margins reduce significantly.

•   For the independent producers, there will be no change in the behavior. The only impact for them will be the reduction of their profit margins. Also, for the small and highly leveraged companies operating in the shale oil space in the US, new wells will reduce significantly, and shale oil production will reduce.

•   Production of high cost oil like Canadian oil sands will halt production completely.

•   New deep-water projects could continue by renegotiating the rates of drilling rigs and other oilfield services, which constitute a major chunk of the CAPEX.

•   Oil field services companies will take a significant hit on their margins and will need to revisit their business models to survive.

•   New build market for drilling rigs will collapse as a large number of 5th generation plus rigs have already been built in the last couple of decades. Older rigs will get scrapped.

•   FPSO market is expected to survive based on reduced initial CAPEX and possible renegotiation of day rates.

•   Most of the oil field equipment manufacturers will shift out of China, some will move back to US, and some will shift to the other Asian countries.

Impacts on the global LPG demand & supply

The worldwide LPG production in 2020 is about 310 million tonne per annum. Over the last 5 years, US share in production has grown to nearly 25 {4f8b3ed9fef9ea84dcab9ecab3909d1faac4098bcd4a30a2275db8b2fbfea39e} and is now the largest exporter of the LPG with most of the increased production is from Shale gas / oil. Major importers of LPG are China and India, and along with Thailand contribute to the maximum increase in demand.

Impacts on the PNG & LNG Demand & Supply

In 2019 LNG grew by 12.5{4f8b3ed9fef9ea84dcab9ecab3909d1faac4098bcd4a30a2275db8b2fbfea39e} to 359 Mln tonne / annum. Current LNG plants which are under construction will get completed by 2021 leading to further increase in capacity.

We expect the demand to increase to 700 Mln tonne / annum by 2030.

•   Henry Hub price for gas is currently at about US$ 1.75 / MMBTU. This is expected to be in the range of US$ 3-4 / MMBTU in the near future

•   No significant impact of COVID on the LNG market is expected, except for short term drop in the spot market rates (about US$ 5 / MMBTU JKM in April trades)

•   Currently, liquefaction capacity being added in the US and Australia.

•   Increase in demand is expected mainly from Europe & Asia

The drilling of oil has reduced remarkably in the US, with the operational oil rigs reducing to 512 from 986 a year back, as per Baker Hughes. This number is likely to reduce further in the coming weeks in the account of the current trend. Lesser drilling could help in a reduction in supply, leading to the stabilization of the prices. However, if the industrial demand keeps diminishing, due to the prolonged lockdowns, the future oil price may continue to slump further.

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