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Global Oil and Gas Demand Recovery a Long Way Out: Rystad Energy

COVID-19 Insights Energy June 18, 2020
COVID-19 Insights Energy June 18, 2020
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Global oil and gas demand may take as long as 24 months to recover from the impact of the COVID-19 pandemic, which virtually shut down the oil and gas industry as it took cars off the road and jet airplanes out of the sky, severely impacting the use of fossil fuels, Artem Abramov, Rystad Energy’s head of shale research, told the BMO Capital Markets Energy conference.

Interviewed by BMO Capital Markets Managing Director and Oil & Gas analyst Randy Ollenberger, Abramov said any recovery in demand will be tempered by structural shifts in the markets to renewables and alternative technologies, in regions like the U.S., Europe and North America, but lifted by continued strong demand for oil out of Asia.

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“We don't see demand returning to pre-COVID-19 levels before late 2022 to 2023,” he said during a keynote address to open the June 10 conference, adding that a potential second wave of the pandemic, if it were to materialize, would see further demand destruction. “But if this doesn't happen, then we'll definitely be back to normal from 2022 to 2023.”

Markets in Balance

Abramov said the global oil market is currently “almost” balanced, boosted by the agreement among OPEC and allied nations – OPEC-Plus – to cut about 10 percent of world supplies.

“From the perspective of total production, and total current consumption, yes, we have almost reached the balance,” he said, adding that the OPEC-Plus agreement probably surprised the market in terms of the degree of compliance, despite some concerns about the ability of certain producers to hit production targets.

The next up-cycle in oil and gas, Abramov said, will be different from previous growth cycles, because the business model has changed so dramatically from even a year ago, particularly for large producers. That will especially be the case for US shale, he said.

“We really went from a period of systematic overspend, aggressive activity and production expansion into the new phase with more disciplined and balanced capital programs,” he said.

“In the next cycle, we think that a majority of well-established large producers and also super majors will really drive the next phase of growth because, to some extent, they're the only ones which will be able to increase capex organically.”

The cost paradigm is also likely to shift for U.S. shale, he said, with commercial breakeven levels falling just as they have in previous down cycles.

Abramov noted massive deflation of between 20- to 30 percent since the beginning of the oil crash. He said that, even as markets recover, service prices will likely stabilize at a level below where they were prior to the oil price crash.

“So, as we move into 2021, whatever was commercial in $50 environments, will probably become quite commercial in $40 environments. It's very similar to what we observed during the previous down cycle.”

He said smaller operators, especially private equity-backed companies that previously accounted for a large share of growth, will not come back as quickly as they have in the past.

Demand Destruction

On the demand side, the lockdowns and slowdowns associated with COVID-19, including cut-offs in jet fuel consumption and lower road traffic, all contributed to demand destruction, but he said markets are slowly recovering after hitting bottom in April. Road traffic, for example, has been recovering in all regions, but with some countries lagging.

Gas and LNG markets are similarly depressed, he said, with prices eliminating any economic incentives for LNG exports from the U.S. to Europe and even to Asia, despite some economic recovery in that region.

“From a longer-term perspective we remain very positive about the LNG story for many different regions,” he said, pointing in particular at North America, where the price outlook toward the end of the decade will support planned LNG projects for the United States and Canada.

“I think the world needs many new LNG projects, especially from North America, which will act almost as a kind of a swing player in this equation,” he said. “But the business model of LNG producers in North America will have to change because when U.S. LNG markets started several years ago, what we saw initially is that there were no long term agreements. U.S. LNG was just flowing into the markets with the highest prices net of transportation costs.”

Going forward, American LNG companies are trying to secure long-term agreements to find end buyers before they make final investment decisions.

“There are a lot of projects that will never materialize, but some of the best projects will be needed, especially in the second half of the 20s.”

Renewables Review

Abramov said a trend of oil and gas companies committing capital to environmentally-friendly investment initiatives like renewable resources will continue as the world slowly emerges from the pandemic, but it’s a trend that will likely be limited to larger companies.

He said super majors and also some of the largest independents like Equinoror Repsol, whose size affords them the luxury to act on long-term views, , are already planning for the transition to a lower-carbon economy.

“They understand that global liquid demand will ultimately peak, and gas will stay around for several decades, also in the renewable era, but in order to stay in the business, because they are so large, they need to start investing into some alternative energy sources already now, because this structural shift in the markets will happen,” said Abramov, adding that, for smaller companies, it is more challenging, because they don't have the spare capital to invest in alternative energy sources.

“In the longer term, I think there will be a general shift and we will see that more and more oil producers will start considering alternative industry segments.”

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Randy Ollenberger Oil & Gas Producers Analyst BMO Nesbitt Burns Inc.


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