Embed Size (px)
Citation preview
What’s next for the Oil & Gas Sector after COVID-19?
June 15th, 2020
Post-Covid Scenarios for the Global Petroleum Industry
July 1st, 2020
Rodolfo Guzmán Daniel Monzón
Managing Partner, AmericasE: [email protected]
Partner, LATAME: [email protected]
Cesar Garcia Brena
Principal, MexicoE: [email protected]
3
Massive Cancellation of Projects
Operational shutdown of some high-cost oil
Major capital projects cancelled or delayed
More Vulnerable Refineries
Low/negative margins will accelerate expected shutdowns
No CAPEX/financing available for quality/ conversion upgrades or greenfield projects
Asset Portfolio Restructuring
Many asset classes become less attractive for oil companies
Active transaction markets with many distressed assets becoming available on the market
Key Trends in the Oil & Gas Sector
COVID-19 will accelerate the Oil & Gas industry’s transformation journey with oversupply and low prices expected to last for several months
Overview
Industry Transformation
Increasing decarbonization pressures
Need to improve efficiency / embrace digitalization b
Market Share War
Source: Arthur D. Little
OPEC / Russia / US Frackers
COVID-19
Oil demand collapse in 2020
Energy Transition
COP-21 / Global warming concerns
4
0
20
40
60
80
100
120
140
2003
2008
2014
2000
2009
2002
2001
2011
2004
2006
2012
2010
2005
2015
2016
2017
2013
2018
2019
2007
2020
The oil industry has suffered several price crashes in the last few decades. What is different this time?
Monthly Brent Barrel Spot Price USD(2000 to 2020*)
Sector background – oil price history
Source: Arthur D. Little, Investing, eia, Oil Price*Note: 2020 = Average Brent Spot price January 01 2020 to May 31 2020
Price War Saudi Arabia
VS US Frackers
Global Recession
Price War
VS
+ Covid 19
5
The Oil & Gas sector had already been underperforming for several years, and COVID has accentuated this trend in recent months
Sector background – stock market performance
1-Jan 1-Mar1-Feb
0%
1-May1-Apr 1-Jun
20%
40%
60%
80%
100%
120%
S&P 500
S&P 500 Energy Sector
Total Return of S&P 500(2010 - 2020)
Weekly S&P 500 VS S&P 500 Energy SectorUSD (January – May 2020)
Covid 19
Source: Bloomberg, Market Watch, ADL analysis
0%
50%
100%
150%
200%
250%
300%
2/1
/2010
2/1
/2011
2/1
/2012
2/1
/2013
2/1
/2014
2/1
/2015
2/1
/2016
2/1
/2017
2/1
/2018
2/1
/2019
2/1
/2020
S&P 500 Oil & Gas Sector S&P 500 index
Pric
e c
olla
pse
Paris A
gre
em
en
t
6
The European Majors have been accelerating their decarbonization efforts, while the US Majors are reacting more slowly
Sector background – Energy Transition
Source: Company annual reports and press releases; ADL analysis, Rystad
According to Rystad, over the next five years, Oil Majors are expected to invest up to 17.5 billion in clean energy projects being Equinor the leader with 57% of the total investment
European Majors US Majors
Left its $500 million of low-carbon investment unchanged this year
50% reduced Carbon intensity
To be Net-Zero CO2, on an absolute basis by 2050 across all operations
8% of renewables in 2019 CAPEX
25% of R&D budget is now low-carbon & energy efficiency
Net-Zero CO2by mid-century
2% of renewables in 2019 CAPEX
Build in Gasvalue-chain (incLNG for transport/ shipping)
Net-Zero CO2
by 2050 or sooner by selling more green energy
Aims to invest $1.5-$2bn p.a. low-carbon electricity
2 GW solar, 2 GW gas, with aim of 25 GW renewable by 2025
Short-term goals between 2016 & 2020:Cut methane emissions by 15%
Reduce the burning of excess gas at wells by 20%
OngoingEfforts
Net-ZeroCO2
Goals
No concrete Net-Zero CO2
ambition announced
No concrete Net-Zero CO2
ambition announced
To be Net-Zero CO2, on an absolute basis by 2050 across all operations
By 2023:
Lower Oil net GHG Intensity by 5-10%
Lower Methane emissions intensity by 20-25%
Announcement to split its business into two: one covering oil and the other for renewables
Obtain by 2050 an 80% reduction in net emissions, (entire life-cycle of the energy products)
7
Average global reductions of over 12 MBD (12% of total petroleum consumption) are expected for 2020
Source: Rystad, ADL Estimates.
Demand Side
-2
Feb-20
15%
-17
-9
Mar-20 Sep-20Aug-20
-10
-28
-14
-11
Apr-20 May-20 Jul-20
30%
Jun-20 Oct-20 Nov-20 Dec-20
-8
-21
-14 -13
13%
-8
0%56%
10%3%
9% 10% 9%
10%
29%
62%
22%
39%
13%
18%39%
30%
24%
16%
21%
39%
29%
22%
22%
16%
33%
32%
26%
Jan-20
27%
34%
32%
12%
23%
35%
33%38%
15%
30%
40%
21%
29%
22%
29%
39%
22%22%
Gasoline Jet FuelDiesel Other Fuels Estimates
2020 Petroleum Product Demand Reduction by Type of ProductMillion bpd
8
US became the top oil producer taking advantage of technology evolution after a period of high crude prices
Russia-Saudi Arabia market share battle has created an oversupply situation
0
2
4
6
8
10
12
14
1997
2019
2006
2003
1998
2004
1999
2002
2001
2000
2007
2005
2008
2009
2010
2011
2012
2018
2013
2014
2015
2016
2017
Saudi Russia United States
Source: BP Statistical Review 2040, EIA International Energy Outlook, ADL Estimates,
Saudi Arabia continues to fight with Russia for market dominance while trying to halt the growth of US shale supply
US-Russia-KSA production of crude oilMMBD, 1998-2019
Supply Side
9
Oil production costs favor OPEC’s ability to increase market share, but low oil prices can challenge national budgets and political stability
Supply Side – Production Costs
Much of OPEC’s generally very large reserves volumes can be produced at very low costs
But, current oil prices are too low for petroleum based economies to support their national social and economic programs. This places their political stability at risk
2.8 3.14.0 4.3 4.4 4.8 5.1
5.76.7
7.47.9 8.4 8.6 9.0
10.410.6
13.2 13.314.2
17.8
0
2
4
6
8
10
12
14
16
18
Ango
la
Iran
Alg
eria
Russ
ia
Kuw
ait
UA
E
Qat
ar
Iraq
Lib
ya
Saudi A
rabia
Aze
rbai
jan
Kaz
akhst
an
Mex
ico
Norw
ay
Nig
eria
Bra
zil
Can
ada
Ven
ezuel
a
USA
Chin
a
US$
/bar
rel
Source: BP Statistical Review 2040, EIA International Energy Outlook ,ADL Estimates
Average Oil Lifting Cost By Country $/Bbl
10
Aided by OPEC + cuts and curtailments by high cost producers, total crude oil supply has been reduced by over 12 million b/d since March
Supply Side – Production cuts
OPEC + & Non-OPEC Production*(Million bpd)
50.4
39.9
35.2
31.5
25
30
35
40
45
50
55
01/2
0
12/1
9
08/2
0
02/2
0
11/2
0
03/2
0
04/2
0
05/2
0
06/2
0
07/2
0
09/2
0
10/2
0
12/2
0
-21%Oil Production Revisions
(Jun-20 vs Mar-20 Forecast in million bpd)
-3.8
OPEC (ex. KSA)
-2.9
-2.2
-2.2
-1.4
-0.2
-0.1OPEC + Non-OPEC
Source: Rystad, ADL Estimates Note* Values excludes NGLs and other liquids
Estimates
-10%
11
}
The dramatic drop in oil prices has triggered considerable reductions in the E&P investments that had been planned for 2020
Supply Side - CAPEX Reductions
Text
Text
Text
Shell reduced its capex by at least $5 billion at the end of March
It is going to cut operating expenses by $3 billion-$4 billion
Chevron has announced a capex reduction of $4 billion
BP has reduced its capital budget by 25% and announced layoffs of 10,000 employees
Text ExxonMobil reduced its capex by
30% in early April, which amounts to around $10 billion
CAPEX Reduction Announcements
Source: Company annual reports and press releases, Union of Concerned Scientists
Text
Text
The company plans to cut investments, exploration drilling and operating costs by around $3 billion in 2020
Total will implement CAPEX cuts of more than 20% of their 2020 plan, or more than $3 billion
12
In Latin America the rig count has plummeted in all countries, except for Mexico
Supply Side – Latin America
Baker Hughes Rig Count2019- 2020
0
20
40
60
80
100
120
140
160
180
Jun-19Feb-19Jan-19 May-19Mar-19 Aug-19 Mar-20Apr-19 Jul-19 Sep-19 Oct-19 May-20Nov-19 Dec-19 Jan-20 Feb-20 Apr-20
Source: Rystad, Baker Hughes, ADL estimates
Other
13
Russia deny support to OPEP+
new agreement
0
10
20
30
40
50
60
70
80
JuneFebruaryJanuary March April May July
-71%
-23%
+117%
Oil prices have recovered significantly since OPEC + agreed to supply cuts in mid-April, but they are still well below 2019 levels
Brent Spot Price - Dollars per barrel
First Covid-19 notification in
Wuhan
Oil War
VS
Source: Arthur D. EIA, Forbes, World Health Organization, Press release, El País, Oil Price
Oil prices below $40/barrel have been causing production shut-ins, mainly in North America
WHO declared Covid-19 Global
Pandemic
WHO declared Global Public-
Health Emergency
First infected in the US
Death Toll by Covid-19 surpasses SARS
Covid-19 Oil Price War
Oil Price Impact
OPEC+ Supply Cut
(-9.7 MMBD) Agreement
OPEC+ Agreement extended
14
Est. size of impact
(illustrative)
All industry segments are being impacted by volume and price drops, the resulting financial collapses and related supply chain/operational disruptions
Short Term Impact
Supply chain
Operations
Est. size of impact
(illustrative)
Low negative impact
Moderate negative impact
Limited impact Positive impact
Customers (incl. demand)
High negative impact
Field Operations
Storage restrictions for oversupply
Some production assets cannot cover cash costs
Negative economics for some shale, deepwater and Canadian operations
High level of oversupply
Penalization for non-standard crudes
Manpower at minimum possible level
Operators to prioritize low-cost assets
Limited to minimum staff
CAPEX initiatives and turnaround stopped
Daily vs. monthly optimization
Low utilization rates drive low to negative margins for some locations and configurations
Transport & Distribution
Oil Field Services
Spare part access will be critical, especially from China
Drill bits / tools limited impact given low activities for new wells / exploration
Exploration / appraisal / new wells will halt
Well intervention/workover to remain steady especially for rig-less activities
Many contracts will be renegotiated /cancelled
Little room for additional efficiency gains
Demand will reduce until operators stabilize strategy
Brownfield activities will be dominant
Critical impact
Refining
Price/Margin
Already contracted crude needs to be re-sold
Storage restrictions for crude, intermediate and final products
Lower revenues because of volume drop
Financial stress for retail dealers requires support
Some production halt because of lack of storage downstream
Demand decrease until isolation ends and economy recovers
Limited to minimum staff
CAPEX initiatives reduced or stopped
Demand decrease under minimum production level for some refineries
Demand mix change towards heavier fuels
Source: Arthur D. Little
15
“L-Shape”
“V-Shape”
Exte
nt
of
Covid
-19 i
mp
act
Different scenarios can be envisioned for the petroleum industry over the next few years
Future Scenarios
Impact of Demand reduction vs Oversupply
Stagnation IOCs transform to survive Many projects cancelled Smaller industry, lower cost
focus
Back to Normal Most delayed projects
restarted Some high-cost producers
collapse IOC re-focus on shareholder
returns and efficiency gains
New Normal IOCs accelerate Energy
Transition Major CAPEX reductions OPEC+ countries dominate
supply
Severe Injury Fast forward to Energy
Transition Extensive project cancellations High-cost production
shutdowns
Short-term oil oversupply Long-term oil oversupply
Source: Arthur D. Little
16
Although the impacts will be differentiated by segments, most of the scenarios will have significant and lasting effects on the industry players
Impact by player under each Scenario
Modest change Mild shakeout Major shakeout Severe impact
Back to Normal New Normal Stagnation Severe Injury
Low Cost NOCs (Saudi Arabia, Kuwait…)
Moderate & High Cost NOCs
IOCs
Refineries
Oil Field Services
Source: Arthur D. Little
Impact by Player under each Scenario
17
Transform and survive
Low cost /XL NOCs
Super Majors able to transform
Global oil field service companies
Some niche players/regional “Mini Majors”
…..
Immediate and lasting impacts on the industry likely to drive a structural transformation, leaving fewer, smaller players after the crisis
Industry Structure Impact
Shrink/collapse or acquired
NOCs with high cost/low reserve base
Shale focus producers
Small scale independent refiners
Heavy oil/Canadian tar sands players
……
Who would be the survivors of current crisis?
Source: Arthur D. Little
Some new business models would emerge and success in the new industry ecosystem
Low prices/margins will last for years
Production and refining shutdowns in many areas
Financial collapse already underway for some companies
Asset sales and consolidation by small and large companies
Ongoing major projects no longer profitable
Cost of capital for fossil fuel projects to increase even further
18
The oil & gas industry will accelerate its transition to a cleaner and more diversified portfolio of energy sources, products and service offerings
Industry Structure Impact – Future Ecosystem
Global
Regional
Local
Fossil fuel focus Diversified energy
XL Oil Co
Diversified Energy Holdings (IOCs)
US Drillers
Trading Houses
Regional Majors
Special-Purpose Vehicles
Global oilfield service companies
Retailers
Source: Arthur D. Little
Potential ecosystem for future oil companies
19
Governments/municipalities pressure for low CO2 emissions
EU commitment to align emergency funding with “green targets”
So, oil demand was expected to peak and fall in the coming decades anyway
With high oil prices, it used to be attractive to invest in E&P projects
But oil projects now have lower returns, and higher uncertainty than before
Renewables have lower technical risks and now potentially lower commercial risk and higher return rates than oil
The crisis will severely impact the oil industry, accelerating its energy transition, already underway, and altering its climate change approach
Industry Structure Impact – Energy Transition
Fossil fuels may be more competitive
Cheap oil would change customer feeling about “going greener”
Power generation prices already lower, partly due to lower fossil fuel prices
Higher renewable subsidies will be required to reach customer breakeven
Governments would give priority to economy recovery support after recession (i.e. reducing EV rebates)
US & Canada would support oil industry from collapse
Energy Transition would accelerate
Source: Arthur D. Little
20
Oil industry players have no choice but to accelerate the transformation of their business models
Key Insights for Oil Executives
Key Drivers Strategic Implications
Long Term Sustainability
1
Sustainable business models must incorporate actions to reduce the carbon footprint requiring a shift away from hydrocarbons
Investments in renewables, electrification, energy management, carbon capture and emissions offsetting will all play a key role in future strategies
3
Innovation and cost efficiency will be essential capabilities for survival
Digitalization and automation opportunities should be leveraged across the whole value chain
Operational Effiiciency
Capital Allocation 2 Shareholders will demand increasing discipline in the use of capital Project portfolios must be rebalanced and actively managed to
provide more flexibility and resilience to low price scenarios
Source: Arthur D. Little
21
Mexico will need to prepare for an increasingly challenging industry and a tougher economic environment
Conclusions – Insights
In the near term we expect production to show a declining trend
Non-conventional resources at risk of becoming stranded resources
Deep water projects likely to be delayed and we expect to see more relinquishments or renegotiation of commitments
Increasing financial stress leading to higher cost of capital
Many E&P projects will not reach breakeven/hurdle rates
Natural gas segment will be challenged by US low prices
Many contracts may need to be renegotiated, but it is important to ensure the long term viability of the service industry
CSIEE contracts will be difficult to implement because of the limited potential upside for private parties
Government dilemma on how much to spend in supporting petroleum investments vs. economy aid programs
Player Insights
Source: Arthur D. Little
22
Questions
Questions or comments?
