What's Next for Oil & Gas? Recovery Scenarios and Navigation Strategies to Power Through the Crisis
WHAT'S NEXTFOR OIL & GAS?RECOVERY SCENARIOS AND NAVIGATIONSTRATEGIES TO POWER THROUGH THE CRISIS WHAT'S NEXTFOR OIL & GAS? WHITE PAPER2WHATS NEXT FOR OIL & GAS? RECOVERY SCENARIOS AND NAVIGATION STRATEGIES TO POWER THROUGH THE CRISISINTRODUCTIONThe oil and gas industry is experiencing its third market and price crash in the last 12 years. Today, the market faces increased global turmoil and supply wars, compounded by the unprecedented disruption caused by the COVID-19 pandemic. The result has been a crippling blend of drastically decreased demand, lack of storage capacity, and oversupply.Integrated oil companies, particularly upstream independents, took the crashes of 2008 and 2014–16 on the chin, but eventually recovered. In 2008, the crash was caused by a much broader economic collapse that decimated demand for petroleum products. In 2014–16, the crash was of much longer duration as the result of the confluence of slowing Chinese growth and a Saudi attempt to curtail massive American gains in global supply from shale resources. The oil producers’ ability to respond financially is more constrained now than it was in the past, owing to two factors:• Profit levels are lower than during the previous crash. In late 2019, prior to the crisis, it was reported that many shale producers’ profits were lower (though oil prices were above $60 per barrel — the average shale breakeven price) than they had been in 2015–16 with prices twice as high as they have been during the pandemic.1 Though oil futures prices will continue to fluctuate with every month’s physical delivery, it remains unlikely that a sustained average shale breakeven price will be approached in the near future.• The scope for consolidation is limited. Instead of being able to snap up smaller shale producers, as during the 2014–16 downturn, a handful of companies now find themselves as the major shale producers at a time when capital markets have come to distrust the shale profitability story.1 Bradley Olson, Rebecca Elliott and Christopher M. Matthews, “Fracking’s Secret Problem—Oil Wells Aren’t Producing as Much as Forecast,” Wall Street Journal, 1 January 2019. Retrieved 5 May 2020 from https://www.wsj.com/articles/frackings-secret-problemoil-wells-arent-producing-as-much-as-forecast-11546450162 WHITE PAPER3WHATS NEXT FOR OIL & GAS? RECOVERY SCENARIOS AND NAVIGATION STRATEGIES TO POWER THROUGH THE CRISISThe troubled state of the industry can be attributed partially to excessive shale supply.2 Another factor is declining demand due to climate change concerns and the increased adoption of electric vehicles (EVs). These pressures had already begun to create a sense of urgency for the transformation of the sector; the pandemic and market slump will accelerate change. Stakeholders and shareholders are already watching and agitating, demanding improvements from boards; the former want to see more focus on sustainability, and the latter unsurprisingly prioritize shareholder returns. Boards and executive leadership will need to make strenuous efforts to identify strategies that will produce desired results for both stakeholders and shareholders. Failing to do so will result in mass obsolescence of the oil producing firm.While oil and gas as primary fuel will continue to be relevant for the next 30 years, the emphasis will slowly shift away from modular liquid fuels to more power generation and petrochemical products. Producers that re-state their business models — and, effectively, their raison d’etre — will come out stronger and with a renewed purpose in enterprise and society. Those that fail to do so will either fall to a re-consolidation wave, or slowly wind down their operations, like the coal miners. Amid this realignment, there are some short- and medium-term levers that all leaders should consider incorporating into their strategic approach, regardless of the long-term business trajectory. This paper highlights realistic steps that procurement and supply chain organizations can take in the immediate term to help oil and gas companies navigate the next 12–36 months and deliver tangible value to the enterprise. It also outlines various scenarios that may come about in the medium term, and the attendant implications for procurement and supply chain management (PSCM) in the industry. The paper also outlines three scenarios that may come about in the medium term — Full Recovery, Go It Alone, and Greener Growth, as presented in a report by research and consultancy firm Wood Mackenzie3 — and their implications for PSCM. Note: U.S. production doubled from 2008 to 2018, an unprecedented supply increase in a mature commodity industry. See “Statistical Review of World Energy, ” BP, June 2020. Retrieved 1 June 2020 from https://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy.html“The Future of Energy After COVID-19: Three Scenarios,” Wood Mackenzie, May 2020. Retrieved 12 May 2020 from https://theworldafte
