Low Investment In Oil, Gas May Pose Future Challenge

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The outbreak of COVID-19 pandemic set the oil and gas industry on a tail spin. Major oil consumer, China, shut down its factories while the price of Brent crude sunk below $20 per barrel in second quarter of last year, putting spanners in the economic wheels of oil dependent economies such as Nigeria’s. This led to oil majors scaling down their investment projection in the sector for this year. Experts say this may negatively impact the industry, reports LUCAS AJANAKU.

The impact of the outbreak of coronavirus on the oil and gas industry across the world became clearer when the oil majors started releasing their yeraly reports for the year.

Nigeria, according to the upstream investment arm of the Nigerian National Petroleum Corporation (NNPC), the National Petroleum Investment Management Services (NAPIMS), has risen very fast and steadily to host the world’s 10th largest reserves at about 25 billion barrels. Within the Organisation of Petroleum Exporting Countries (OPEC), Nigeria is the sixth in terms of reserves and daily production.

Six oil companies – Shell, Chevron, Mobil, Agip, Elf and Texaco – dominate the oil industry in the country and together, they hold some 98 per cent of the oil reserves and operating assets. All have taken a hit of the pandemic.

French oil major, Total reported a massive drop in full-year profit, following a tumultuous 12 months in which commodity prices collapsed amid the coronavirus pandemic.

The energy major said full-year 2020 net profit came in at $4.06 billion, beating expectations of $3.86 billion from analysts polled by Refinitiv. It compared with $11.8 billion for the 2019 fiscal year, reflecting a drop of 66 per cent year-on-year.

Another top U.S. oil producer ExxonMobil posted its first annual loss as a public company after the COVID-19 pandemic hammered energy prices and sliced over $20 billion off the value of its shale gas properties in Q4.

The company reported a net yearly loss of $22.44 billion for last year, compared with a full-year profit of $14.34 billion in 2019.

The oil majors have warned that the ongoing coronavirus crisis is likely to continue to impact their performance in the near-term while seeking to reassure investors about their future profitability.

Total reaffirmed this trend in its full-year results, saying the oil environment “remains uncertain and dependent on the recovery of global demand, still affected by the COVID-19 pandemic.”

Another oil major, Chevron said its group revenue plunged 31.2per cent from last year to $25 billion, again missing analysts’ estimates of $26.38 billion tally.

Its CEO Mike Wirth, said:”2020 was a year like no other. We were well positioned when the pandemic and economic crisis hit, and we exited the year with a strong balance sheet, having completed a major acquisition and increased our dividend payout for the 33rd consecutive year.

“When market conditions deteriorated, we swiftly reduced capital spending by 35 per cent from 2019 and also reduced operating costs, demonstrating our commitment to capital and cost discipline.”

Excluding severance expense, 2020 operating expenses were down $1.4 billion from the prior year, he added. Chevron also completed an enterprise-wide transformation programme and the integration of Noble Energy, positioning the company for the future.

Last month, the oil giant cut its  capital spending forecast for this year to around $14 billion, including around $300 million in costs linked to the lower carbon transition, as it looks to shift investment away from traditional oil markets and into lower carbon alternatives.

That followed news that Chevron would cut around 25per cent of the workforce at Noble Energy, which it acquired in a $4.1 billion takeover in October, adding to its aim of reducing it global workforce by as much as 15per cent.

The impact of the tumult is not lost on S&P Global ratings, one of the most influential rating companies. It warned last month that it may cut the credit score on a number of major producers, including Total, Royal Dutch Shell and ExxonMobil.

The rating firm said it believes “the energy transition, price volatility, and weaker profitability are increasing risks for oil and gas producers.”

Following an unpredictable and shocking 2020, stability and sustainability are set to be the two major themes in the oil and gas industry this year, according to Oilprice.com.

Companies in the sector will continue prioritising financial resilience to boosting upstream investments, as global oil demand, although higher than in 2020, will still be below the pre-crisis levels.

Energy research and consultancy firm, Wood Mackenzie, in its 2021 outlook into the biggest themes in the oil gas industry this year said more and more oil and gas firms will include sustainability, the energy transition, and Environmental, Social, and Corporate Governance (ESG) considerations in their strategic and investment plans.

Its Senior Vice President of Corporate Research, Tom Ellacott, said: “New businesses, and new business models, are emerging from the wreckage of 2020. Companies will focus their investment on building a foundation which will be sustainable across a range of scenarios.”

Diversification into green energy, including renewable electricity generation, hydrogen, and carbon capture, is set to accelerate, as a growing number of oil and gas firms will start talking about decarbonisation and net-zero emissions targets.

The upstream will continue to be a core business for the major oil corporations at least for a few more years, as it will continue to be their cash cow.

The reshaping of the portfolios and the careful capital allocation after the third major shock to the industry in just over a decade will see continued underinvestment in oil and gas, analysts say.

The declining upstream investment, if not reversed in the next few years, could lead to a crude oil supply gap later this decade, regardless of when peak oil demand will occur. The world will need large amounts of oil even when global oil consumption stops growing.

Following the shock of last year, most oil and gas companies will be very careful with capital spending this year, and upstream investment is set to remain flat over 2020, although oil prices are expected higher than last year.

Wood Mackenzie said the industry will invest around $300 billion in upstream oil and gas this year, flat compared to 2020, and close to a 15-year low.

Its Head of Upstream Analysis, Fraser McKay, said: “Falling prices would mean rapid cuts, whereas at higher prices, contingency and resilience will outweigh enthusiasm to take advantage of a nadir in service sector costs.”

Around 20 large-scale oil and gas projects are expected to be endorsed this year, up from only 10 in 2020, but half of the final investment decisions (FIDs) that were being taken each year before the pandemic. Moreover, projects will be increasingly judged by their ESG credentials, Wood Mackenzie said.

For many companies, reducing debt will take precedence over boosting investment, while many others will optimise their upstream portfolios to turn in faster cash generation.

“We expect to see short-cycle opportunities move even further up the capital allocation pecking order, with exploration and marginal long-life projects losing out in the competition for capital,” Ellacott said in the 2021 outlook.

Rising renewables investment

Last year, the crash in oil prices and the look into what reduced oil demand could mean for the industry prompted many European oil majors to unveil strategies for net-zero emissions within three decades.

Rather than stalling, the pandemic accelerated the efforts toward a lower-carbon energy mix, also supported by growing pressure from shareholders, society, and many governments vowing to ‘build back better’ with a focus on clean energy.

The oil and gas industry will be raising investments in green energy this year, according to new research by DNV GL, a technical advisor to the sector.

A record two-thirds, or 66 per cent of senior oil and gas professionals said their organisation was actively adapting to a less carbon-intensive energy mix in 2021, up from 44 percent in 2018. Around 57 per cent plan to increase investment in renewables, up from 44 per cent in 2020, the global survey of over 1,000 senior industry professionals and executives showed this week.

To compare, a fifth of respondents, or 21 per cent, reported their organisation would boost investments in oil projects this year.

“Decarbonisation has moved from something on the horizon to an immediate priority, and there are signs that our sector may invest to transform rather than cut its way out of the present crisis,” Group President/CEO of DNV GL, Remi Eriksen, said.

According to Oilprice.com, the growing industry focus on low-carbon energy solutions could leave the oil market exposed to a supply deficit in just a few years.

Non-memeber countries of the Organisation of Petroleum Expoting Countries (OPEC+) has a lot of spare capacity that could come on stream when demand recovers. But sustained investments in oil and gas will be needed to meet global consumption of oil, which the world will continue to need, peak demand or not.

“The world may be sleepwalking into a supply crunch, albeit beyond 2021. A recovery in oil demand back to over 100 million b/d by late 2022 increases risk of a material supply gap later this decade, triggering an upward spike in price,” says Simon Flowers, Chairman and Chief, Analyst at WoodMac.

– The Nation

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