Who Can Survive Below $20 per Barrel Oil?
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Who Can Survive Below
$20 per Barrel Oil?
April 2020
The oil market has taken a thrashing in However, the degrees and severity of the
recent months following a crash in crude impact of traditionally low prices on oil and
demand caused by the COVID-19 pandemic gas producers can vary from country to
and the collapse of market co-operation country, depending on the diversification of
amongst OPEC and non-OPEC exporters, their economies.
dubbed OPEC+ by the broader market.
Crude oil benchmarks ended a volatile Norway’s economy may be one of the most
quarter with their biggest losses in history, effected from the recent demise, as mineral
as both U.S. and Brent futures were fuels accounted for 55.6% of its total exports
hammered throughout March. Both in 2019. According to Reuter’s data, fossil fuel
benchmarks lost roughly two-thirds of their sales alone earned Oslo $33.3 billion last year,
value in the quarter, with declines in March with crude exports accounting for around 7%
of about 55% accounting for the lion's share of that value.
of the losses. WTI’s 66% plunge for the first
quarter was the biggest decline since the The Reuters rating agency expects business
contract's inception in 1983. Brent’s declines revenue and exports to slump by over 10% of
over the quarter and month were the 2019 value in 2020 in countries such as Iraq
biggest quarterly and monthly percentage and Kuwait. In other countries like Oman,
declines on record. Azerbaijan, Congo, Bahrain and Saudi Arabia,
analysts expect a fall of export revenue of
Biggest One-Day Percentage Drop in Oil between 4% to 8% of GDP, levels still low
Prices enough to hurt their economies. Alexander
Perjéssy, a Senior Analyst at Moody’s, suggests
the decline could be less in countries such as,
Trinidad & Tobago, Nigeria, and Russia, at less
than 3% of GDP, with the heavily hydrocarbon
exporting countries in the gulf most at risk.
What’s more, a further decline in oil prices,
down to the $10-to-'teens' range, remains a
strong probability, as the reality of the physical
market oversupply for the second quarter of
2020 will start to bite and will reflect in the
future prices. Some experts believe that as
much as 10 million barrels per day (BPD) of
worldwide crude production could become
excess to requirement. If this further
reduction were to happen, a $10-20 per barrel
value would wipe off the revenue of some
exporting countries by over 10% of their gross
domestic product (GDP).
Difficult Decisions
for Producers
The ongoing global oil and gas glut is also Stocks across the energy sector have already
posing major threats to IOCs and dropped and even promises about keeping
independents. The true impact of the dividends at current levels won’t bring
commodities uncertainty remains unclear, investors back any time soon. Privately owned
but a wave of bankruptcies can be expected energy companies are being hit, from all sides,
in the US shale industry, the North Sea making them ideal prospects for private
offshore sector, and across the Canadian oil equities and oil majors.
and gas sector.
There is significant opportunity available to
As the current crisis seems likely to stretch for those with the ability to spend, with some
several more months, non-OPEC countries analysts talking about the possibility of a
are also likely to see a decline in their oil negative oil and gas price environment, big
production. The oil majors such as Shell, winners could immerge.
Exxon and ENI, may not yet be in danger, as
their available cash and market share gives Those that do are usually have deep pockets,
them ample security. But other operators are often government-owned majors, NOCs. As
currently poised for a significantly difficult demonstrated in graph (across), the average
period. Debt levels, operational costs, and a costs to pump a barrel of oil in the 13 biggest
broader market crash are pushing some oil- producing nations (mostly government-
companies to the edge. owned majors) is often below the $20 mark.
Many NOCs can still be profitable below $20
per barrel, and many also have long-term goals
of becoming major powerhouses on the world
stage, such as Aramco and ADNOC. With
Gazprom, Rosneft and other Chinese oil
companies impacted by the oil price war, OPEC
oil companies may be preparing to enter the
market. Entering the international market is
the only way for these NOCs to continue their
expansion and ensure future market share.
The coronavirus outbreak's effect on
worldwide oil demand, and the continued
stalemate of the OPEC+ agreement has
created a deep, albeit temporary, shock to oil
prices. If analysts are correct, and oil prices
stay at or below $20, survival will not be a
matter of production costs, but contribution to
national budgets.
Difficult Decisions for
Producers
We are in a time of significant destruction in Crude Oil OPEC Balance Millions bbl /Day. 2020
demand for crude oil and its downstream 2019 2020
products. Indeed, during the first quarter of
(A) World Oil Demand 99.67 99.73
2020 prices of crude oil have declined
Non-OPEC Liquids 64.97 66.74
rapidly. It is easy to assume that the loss in
demand is all as a result of the global Covid- OPEC NGL + Non-Convent. 4.79 4.82
19 pandemic, but the seeds of this loss were (B) Total Non-OPEC + NGLs 69.76 71.56
already sown before the impact of the virus Difference A-B 29.91 28.17
was felt and has only exacerbated by it. The
OPEC Crude Oil Production 29.34 28.18
table below demonstrates the underlying
Balance -0.57 -0.01
challenge.
USA Shale Prod. 7.70 8.32
Crude Oil OPEC Balance Millions bbl /Day
Elasticity of Demand and Substitutes
2018 2019
(A) World Oil Demand 98.84 99.67 Studies have demonstrated that the price
- Non OPEC Liquids 62.99 64.97 elasticity of demand for crude oil is between
- OPEC NGL + NON Convent. 4.75 4.79
+0.023 and -0.019, i.e. practically price
inflexible in the short-term. This is because
(B) Total Non OPEC + NGLs 67.74 69.76 there are no short-term substitutes for
Difference A - B 31.10 29.91 naphtha, gasoline, gas oil or fuel oil. There
OPEC Crude Oil Production 31.34 29.34 are unlikely to be large increases in demand
Balance 0.24 -0.57
with lower prices.
USA Shale Production 6.51 7.70
The result will be that intermediate suppliers
The above table demonstrates that in 2018, will just buy crude oil and put it into stocks.
the OPEC crude oil production roughly For instance, the Strategic Petroleum Reserve
balanced the market and the 2019 cuts in the USA may increase its reserves with
moved the market to a small but cheap crude oil. Similarly, in the short-term,
comfortable surplus. However, whilst the income elasticity of demand for crude oil is
market was in surplus, the USA shale and also relatively fixed. Consumers demand for
other tight oils increased production by 1.19 gasoline for cars or gasoil for space heating
M bls/day which led to OPEC and the OPEC+ does not shift very much in the short- term.
countries losing their market share. The
Energy Industry Insights
OPEC production costs resulted in loss of
market share to the USA Shale oil producers.
The second table (Across Top) below shows
the ongoing production challenges.
Considering OPEC forecasts made in 2019,
substantial production cuts were required in
2020, to maintain the market balance.
However, the OPEC+ partners were not
willing to commit to this.
Difficult Decisions
for Producers
In Russia, the bulk of the oil fields are in Producers who are net importers will be
Western Siberia and the wells are old. They disinclined to cut production, of course, as will
cannot be turned down easily and if they are, those who need production for domestic use.
then many will not recover. Many producers are also highly dependent on
the income generated by their crude, whatever
the crude price.
In the USA, it is often stated that competition
laws will stop producers coming together to Below is a table of estimated oil production in
control competition. Whilst this is the case at 2019. Whilst some 2020 production figures are
the Federal level, it is not the case at the available, these are not considered reliable at
State level. For instance, the Railroad the moment.
Commission of Texas has a duty to protect
the natural and mineral resources of the Production 2019
Country*
State, and as such it can order producers to Thousands bbls / day
cut production. USA 15,043
Saudi Arabia 12,000
The commission will meet, by video Russia 10,800
conference in a few days to discuss ordering Iraq 4,452
potential cuts, something it has not done Iran 3,991
since the early 1970s. China 3,981
However, the USA can also react to low prices Canada 3,663
by letting uncompetitive shale oil wells fade UAE 3,107
away and discontinue routinely drilling new Kuwait 2,924
wells. Other small producing countries, of Brazil 2,515
which there are many, have a similar Venezuela 2,277
combination of problems, or degrees of civil Mexico 2,187
unrest prevents production being cut. Nigeria 2,000
*Top producers with more than 2Million bbls /day
It is a time when crude producers and refiners
are in a difficult position and cannot base their
production decisions on purely business
considerations. A cash crunch is with us.
Companies who do not take the right actions
will not survive. There is an oil prospector’s
adage, “in order to survive in the long term, one
has to survive in the short term.”
Crude Prices In Focus
Due to the recent reductions in demand for and is filling up at the rate of 100 million barrels
refined products brought about by lockdowns a month. However, it also estimates, that well
and travel restrictions, refiners face some within a year, bottlenecks will appear unless
difficult decisions. In a normal year, refiners demand picks up substantially.
complete maintenance shutdowns to prepare
the plants for a northern hemisphere driving If refiners slow down refining operations and
season. crude storage is practically full, then crude
producers must cut production. Whilst this may
In addition, refiners replenish Aviation sound easy, it is not for technical, political and
Turbine kerosene for the holiday season and marketing reasons. Crude oil wells cannot just
the annual Haj. Furthermore, they usually be turned off without harming the wells.
leave cold winters with gasoil stocks low, Corrosion in the wells may result if they are
(used for space heating), and when heavy merely turned off, or in the case of Russian
fuel oil demand is also reduced. crude, they could freeze. Wells which are
pumped or undergoing water flooding may
Instead, refiners are facing greatly reduced never recover.
demand for their four basic products at a
time when stocks are high, or in some cases In response to such challenges, there are
where storage is full. Therefore, what would several things that crude oil producers can do;
have once been a quite normal, well postpone the drilling of new wells; lower rates
understood, and even a straightforward of water injection; and slow down the
business decision, has become problematic. production rate of existing wells. However, the
laying off of rigs may be the first sign of cost-
Some of the challenges refiners now face: cutting and it is already happening.
1. The timing of maintenance turnarounds,
following the shut-downs, due to the
global pandemic. Refiners do not wish to
miss an upturn in the market, but need
to ensure parts and labour can be
secured in a timely fashion.
2. Should the refiners switch to a summer
production slate, or will there even be
a summer season?
3. How can the production slate be aligned
with demand when the demand
is essentially unknown?
4. What new trading strategies will Saudi Arabia technically can cut its production
be adopted? but does not want to do it alone and thus lose
market share. It has strong gas driven wells that
Kpler (a market data company) estimates that will probably not suffer extensively from being
there is a global storage capacity of 6.25 throttled back, and if enough wells are slowed
billion barrels and on March 31st, stocks were down then a substantial cut in production can
at 4.51 billion barrels of crude, be achieved.
Crude Prices In Focus
Crude
April 2020 Prices In Focus
Stocks
The table below on crude oil stocks
demonstrates how stocks are steadily rising.
Crude Oil Stocks OECD Millions bbl 2017 – 2019
2017 2018 2019 2020
OECD Total 4228 4425 4437 4475
On Water 1025 1011 1011 1200*
Total Forward
92 93 95 99
Days
*Estimated
Spudded (Drilled) Not Fracked
The situation is different for U.S. shale
producers since wells have a relatively short
life, shale oil producers drill wells almost
continually. However, they only need to frack
when it is profitable to do so and therefore,
can flexibly respond to market demand as
long as they have sufficient cash to fund the
drilling.
USA Production Crude Oil Millions bbl / Day
2017 2018 2019 2020*
The Combined Impact
Tight Oil 4.96 6.52 7.70 8.32 In addition to the underlying situation
Gulf of Mexico outlined above, the oil markets are now hit by
1.68 1.76 1.88 1.99
(deep water) reduced short-term demand due to the global
Conventional 2.71 2.72 2.65 2.58
pandemic. On top of this is the threat, Russia
and Saudi Arabia have increased supply due to
Non-Convent.
3.02 3.60 4.01 4.25 the breakdown of OPEC+.
and NGLs
Bio + other 0.76 0.77 1.36 1.57 Thus, the price crash was going to occur even
Total 14.40 16.71 18.40 19.30 if the pandemic had not taken place. The
pandemic has only exacerbated and sped up
*Forecasted
the decline.
In December 2019, 1031 new wells were
spudded and of those 662 well were fracked. Data Sources:
PG, QP, QG, ExxonMobil, QG, OPEC, Rysted Energy
This results in 5,954 uncompleted wells.Crude Prices In Focus
April 2020
www.power-globe.com
Research and Analysis, Global Energy Division
April 2020
In cooperation with
The Abdullah Bin Hamad Al-Attiyah International Foundation
for Energy and Sustainability
www.abhafoundation.org
Qatar Petroleum (QP)
www.qp.com.qa
ExxonMobil Qatar
www.exxonmobil.com.qa
Data Sources: PG, QP, ExxonMobil, ABHAFOUNDATION, QG, OPEC, Rysted Energy.You can also read
