Q&A: Will the oil industry recover from the Covid-19 crisis?

Before coronavirus spread around the globe, there were already looming questions about the future of the energy industry as the world increasingly turned towards renewables. The pandemic has only further shaken the sector.

The challenges facing the industry, to name a few, include: plunging profits, record-low oil demand, and how to promote a green economic recovery in the wake of the virus. Bernard Looney, BP’s new chief executive went as far as to say it is possible the world may have already passed the point of “peak oil” demand. 

The renewable sector has fared better, but it hasn’t been completely spared either. US clean energy jobs were slashed in April, according to an industry group report, as unemployment soared.

Derek Brower, US energy reporter, and Anjli Raval, senior energy correspondent, have had their fingers on the pulse of the disruption in the industry. Today they answered your questions about what oil’s recovery might look like, and the future of the energy sector as a whole. Here are a few highlights from the conversation. 

FT commenter Chemical Energy: Low oil prices in the 90s led to a major wave of oil and gas M&A that touched nearly all of the major western companies. As the oil market stabilises from the Covid-19 mayhem, do you see companies turning again to M&A to gain scale while cutting costs or pursue a diversification strategy? Will carbon neutral and green energy aspirations prevent some companies from pursuing attractive oil and gas M&A opportunities?

Anjli Raval: It is indeed likely that some of the most financially resilient companies will look for acquisitions. The issue in this current environment is that if it’s a good asset there is likely a disconnect between what the seller is willing to sell it for and the price the buyer wants. Also, given companies are cutting costs, streamlining and having to be more thoughtful given their carbon footprint, some of them (particularly in Europe) will be far more selective. If they are pursuing O&G deals at all, it’s unlikely that they’ll go for carbon intensive barrels. One thing to note, the European majors have cut capex but maintained spending allocations for low carbon investments.

FT commenter Recession, what recession?: US shale oil production is dropping rapidly as the tank capacity in places like Wyoming fills up. Will most of the independents close for good? Is the shale oil model shot for good this time? 

Derek Brower: Lots of shale companies will go bust in this crisis. But even among them, many will restructure and keep producing. The model certainly looks creaky — break-even prices are too high, there isn’t a huge amount of fat to be cut to lower them now, and capital markets are essentially closed to most shale producers. So Wall Street isn’t about to storm in with more investment as it did after the last price crash. But the oil isn’t going anywhere and consolidation — when it comes — will put much deeper-pocketed companies in charge of shale. The model of growth-at-all-costs might be a busted flush. But a more efficient shale sector could yet emerge from this crisis. I wrote about this here.

FT commenter Flassest: One “inconvenient truth” highlighted by coronavirus has been how very good plastics are at what they do. How does the energy transition story flex to reflect this?

Raval: This is indeed the case, whether we look at PPE in hospitals or for cleaner ways to manage food delivery. In terms of the energy transition, petrochemicals were always a growing component and will probably be the last segment of oil use to be displaced. One thing to keep in mind is that large volumes of waste from healthcare could be unfit for recycling because of potential biohazards. I would hope greater care is taken to dispose of or recycle these materials and perhaps the world can have a more realistic debate about them that involves a more detailed look at recycling practices and policies against plastic pollution.

FT commenter Chiefkez: After seeing negative crude prices last month and with the WTI futures contract expiring, do you expect a sharp drop again in the price of crude? If not do you feel the price has stabilised due to increased demand or have measures been put in place to reduce the risk of this happening again? 

Brower: The June WTI contract has now expired, without last month’s fireworks. Oil’s pretty strong for now, reflecting optimism about the impact of deep cuts (Opec and US) and the easing of lockdowns. Most of the retail money backed out of the contract well before expiry this time too, which helped prevent another slide.

FT commenter gh: What do you think of smaller producing countries such as Sudan, Uganda and Gabon in the face of this pandemic and low-record oil demand. Are they going to lose out in the global market?

Raval: Countries that are reliant on revenues from oil sales are obviously suffering from the crude price collapse as well as the fallout of the pandemic itself in these nations. The concern is that this could trigger wider political instability and greater poverty in some of these places. Iraq for example hasn’t paid government workers, Nigeria has sought emergency loans, Mexico which is in the middle of an economic overhaul is in trouble. These are relatively big producers compared to ones you mention, but the pain will be felt across the board. Fitch Ratings notes that the Republic of Congo and Gabon will be hit the hardest in the region as oil proceeds accounted for, respectively, around 77 per cent and 57 per cent of current account receipts on average over 2015-2019. Let’s also not forget that the contraction in global gross domestic product and trade will curb demand for the region’s non-oil exports too. The leverage of smaller producers is also lower vs bigger producers.