As the coronavirus crisis wreaks havoc across the globe, no industry has been safe from its effects. Oil and gas are no exception. April 20th, 2020 was the first day in history where oil recorded negative prices. Since the beginning of the pandemic there has been a loss of one third of total demand – that's over 30 million barrels per day.
This drop in demand has many oil traders rightfully worried. Oil may not be as safe a bet as they had once hoped. This, combined with fears of industry obsoletion due to an increasingly carbon-conscious market, means many oil and gas companies need to carve out a new space for themselves to survive. In this article I will discuss some companies that are doing just that – as well as what we may see them do in the future.
One of the largest players in the industry, BP is expected to slash up to $15 billion from its oil and gas assets, its largest writedown in a decade, as well as cut 10,000 jobs. We have already seen some moves away from traditional oil and gas means of revenue with their foray into wind energy, but we now could see an even bigger industry-wide pivot into plastic.
According to the American Chemistry Council, companies including BP, ExxonMobil and Shell have invested $89 billion in 210 chemical projects linked to America's shale gas boom alone over the past decade. A further 133 projects are being planned or in the process of being built.
With renewable energy already threatening the future of oil and gas, coupled with the drastic decrease in demand during the current crisis, firms must look for new streams of revenue in order to find the success they had in the past.
Some are even attempting to alleviate problems arising from the crisis. Industry figure Ian Hannam, who was instrumental in floating and financing many big oil concerns, has since pivoted to coronavirus testing and PPE manufacturing. Meanwhile, French company Total has donated fuel vouchers worth $54.39 million to hospitals across France. Others in the industry have donated their time and money to help stop the spread and effects of the virus.
Change course or suffer the consequences
It's clear that waning demand will have an effect on oil and gas. Many independent drillers and operators were in a dire situation even before this situation. Now many are being propped up with government grants and loans that won't last forever. We will see yet more job cuts and changes in the market when these schemes reach their end.
While the immediate concern of executives in the midst of this crisis is the health and safety of their employees, when this is done they have another pressing problem on their hands. Decreased demand means companies will need to drastically reduce operating costs, as we have seen in furloughing staff or reducing the levels of investment.
Even more drastic measures might be needed, such as rethinking the company's forecasting, selling off assets or restructuring the company's portfolio. Even when things go back to ‘normal' there will still be effects. It's most likely that we aren't seeing something in the industry that we wouldn't see already. The only difference is now the process is being accelerated.
Much like those companies already involved in petrochemicals, many oil and gas companies will need to find alternative revenue streams to survive. Given the uncertainty surrounding the sector, it's unwise for companies to continue on with business as usual.
A report on the Australian industry says that there will be a shift away from large scale, capital-reliant operations and towards smaller developments. These smaller assets will have the advantage of being quick to develop and not needing to be enormous resources for companies to benefit from them.
There is also the opportunity for oil and gas companies to lead the way when it comes to alternative fuels. In the natural gas market, for example, there may be an opportunity to explore other chemicals such as Gas to Products or Gas to Liquids. As there is increasing uptake in electric vehicles, there will also be an uptake in alternate methods to fuel vehicles similar to those most people use.
These are just some of the methods companies will have to employ to survive. The coronavirus crisis has made industry operations untenable in the way they were previously. The current situation has brought about an acceleration in events already underway. Executives must find a way to diversify their revenue streams to stay afloat.