The Current Landscape and National Oil Companies. Winners and Losers
The last month has been somewhat of a rollercoaster for the Oil and Gas industry with everything from a price-war to the mass-suspension of exports and while most have emerged scarred, others have reasons to be positive. The Supply-Demand balance in the oil market has forever been both cyclical and resilient to radical socio-political shifts, however none could have predicted the profound impact that the last month has had on the industry. The crux of the issue is that NOCs are fighting on two fronts – those with a sizeable downstream asset portfolio have seen the Covid-19 global pandemic heavily offset demand – and the upstream sector is set to see forecasts slashed by at least 25%, according to Morgan Stanley.
It would appear then, that the outlook is bleak. Some analysts are concluding that this is the most turbulent period in the industry for a century and that NOCs will have to enter survival mode. NOCs hold the lion-share of Oil and Gas reserves and there are examples of many focussing their attentions in upstream exploration, such as LAT-AM giant Petrobras, who are in the process of selling off all eight of its Brazilian refineries with a total refining capacity of 1.1 million bpd. The glaring question then becomes – which strategy that has been adopted, if any, can provide a reason for NOCs to be positive?
One of said strategies is diversifying. For a number of years now NOCs have been riding the wave of the energy transition and transforming their operations in order to consolidate a considerable market share in 50 years’ time, when the electrification of transport, the era of natural gas and the widespread use of renewables will all be common place. This inevitable shift was discussed at length at the Oil & Gas Council’s National Oil Companies Assembly last year with chiefs from CNPC and Ecopetrol concurring on the trajectory of the Energy Mix. With the oil price plummeting to below $30 a barrel for now, and with it expecting to continue to decrease in value, one might assume that this paves the way for the emergence of renewables, as NOCs look to diversify their energy portfolios. However, the inevitable surge of renewables in the coming decades is going to be a double-edged sword. On the one hand it seems logical that if oil profit forecasts are being slashed and NOCs are diversifying, we should see an increase in investment for renewables, as many IOCs have been doing over the last 5-10 years e.g. Repsol with Solar, ENI with Wind and Hybrid and TOTAL & Equinor in both Wind and Solar, as explored last year at the NOC Assembly. On the other hand, the other edge of the sword is that the consumer is the back-seat driver of the Energy Transition. A decrease in the price of oil and the ongoing OPEC+ standoff is ultimately good news for the consumer as product supply ploughs on, and maintaining the hydrocarbon dominant status-quo will only supress the appetite for renewables. Furthermore, ongoing projects, regardless of whether they pertain to investment in renewables or not, are being halted by the ‘lockdown’ measures being enforced globally as a result of the Covid-19 pandemic and proposed projects are to see a sustained delay on FIDs. The reality is that as the economy continues to slow, NOCs investing heavily in upstream operations and diversification are facing a predicament with more than just a short term effect.
There is however, in the short term, some signs of NOCs with different asset structures seeing some success in the face of this quandary. With reports suggesting that China is emerging from the worst of the Corona Virus outbreak, Chinese NOCs seem to be among the winners in this trialling period. CNPC, CNOOC and Sinopec have all seen significant stock price jumps since the Saudi-Russian stalemate of early March. Beijing has a floor price for refined oil products at $40 a barrel, therefore the cheaper the crude, the larger the profits. It can come as no surprise that analysts are concluding that NOCs with sizeable downstream assets, and regions who are net importers of crude oil are in the fortunate position of being able to profit from the drastic fall in crude prices.
NOCs have to accept two truths: The first is the bitter pill to swallow – the reality that all 2019 forecasts for 2020, based on $50 a barrel and a swift resolution to the Covid-19 pandemic, can be ripped up and thrown away. This is because Oil and Gas media outlets are flooded with headlines bearing “$10 a barrel” and the realisation that it would be naïve to believe that the global fall in demand caused by Corona Virus is a short-term flash in the pan that will soon disappear. The other truth however is the light at the end of the tunnel – NOCs that are re-strategizing and forging short-term resilient measures will be best placed to prosper when the global economy restarts. Granted the pandemic is still ongoing and governments’ policies constantly under review, but the likelihood is that by Q3 and Q4 of 2020, business will pick up again – and it will be then when we see who the winners and losers have been.
These topics will no doubt form a key part of the agenda at this year’s National Oil Companies Assembly, taking place in London on Wednesday, 2nd December 2020. For more information on this year’s Assembly, please get in touch with Matt Maginnis, Project Director, Energy Council.