The Next Normal for Oil and Gas Is Unfolding

“The theme for this quarter is seismic.”

The above statement, from consultancy EY’s new report on the oil and gas market outlook for the second quarter of 2020, perhaps best encapsulates what the industry is experiencing amid the fallout from the COVID-19 pandemic.

 

The report acknowledges that unfolding developments are rendering irrelevant – at least for now – longstanding assumptions about supply, demand and market structure across the oil and gas value chain.

 

Nevertheless, it also outlines possible scenarios to restoring some sense of predictability in the oil and gas markets.

 

Moreover, it predicts the following market trends are likely during the second quarter:

 

  • OPEC+ production discipline will no longer be a factor

 

  • depressed pricing may have a more immediate production impact

 

  • cargos of liquefied natural gas (LNG) and crude oil will struggle to find a home

 

  • refining will not be a refuge.

 

Rigzone recently interviewed one of the report’s authors, EY Global Oil and Gas Leader Andy Brogan, about what the “next normal” could look like in oil and gas. Read on for his insights.

 

Rigzone: What will likely be the long-term damage to the economy and petroleum product demand? Also, what does “long-term” entail?

 

Andy Brogan: The concept of long-term is an elusive one. I’d say we’ll be there when capital flows stabilise. I’m optimistic but there’s a lot of risk. We have no experience jump-starting one which has been deliberately hibernated for a couple of months. It will be almost as if the world were returning to normal from a wartime footing when the workforce was dislocated and the industrial mix radically changed.

 

Mobility is obviously going to be impacted and that’s the biggest question mark for oil and gas.

 

A vaccine or some means of containing cases that’s different from a shutdown emerges would help get people comfortable with their old habits.

 

Rigzone: What will a balanced oil market look like, and how long will it take to get there?

 

Brogan: A balanced oil market is one where pricing supports the marginal barrel and the marginal barrel matters. Right now, supply is so much bigger than demand that it’s hard to imagine we’ll ever get to a place where we “need” more oil and the economic incentives are enough to pay for new drilling, but we’ll get there eventually.

 

The economy will recover and demand will get back to where it was and even grow, but unless OPEC steps in that will take years – not months – to work down the inventories which are accumulating now. OPEC has announced aggressive production cuts, but there are always risks around compliance and how the strategy might change as we get closer to the balance point.

 

Rigzone: What are the major changes to the upstream market makeup we’ll likely see?

 

Brogan: Companies will obviously be looking at their cost structure and how they deploy capital. They will digitise more and approach projects in a more standardised way.

 

There will be considerable consolidation as operators who were struggling can’t make it.

 

Banks and other finance providers will be very focused on ensuring that the new owners are the best owners.

 

Rigzone: Pandemic-induced demand destruction has hit both the upstream and downstream – a unique, two-sided downturn. If you had to guess, which sector of the industry will likely recover faster?

 

Brogan: Downstream. The risks are easier to assess and the market dynamics are more predictable.

 

You can review the full EY report at this website.

 

Source: Rigzone