Impact of COVID-19 on O&G industry Private and confidential July 2020
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Content Impact of COVID-19 on O&G industry
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O&G industry: India statistics
04
Scenario analysis on COVID-19 affected businesses in India
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O&G industry: Post COVID-19
07
Contact Us
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Acknowledgements 08 Impact of COVID-19 on O&G industry
09
Glossary 10
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Impact of COVID-19 on O&G industry
Impact of COVID-19 on O&G industry The O&G industry is facing collapsed oil demand and supply, due to the COVID-19 pandemic and geopolitical issues Global crude oil prices ($/bbl) COVID-19 2
120 100 80
4
60
1
40
3
Brent
2020 F
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2008
-
2009
20
West Texas Intermediate (WTI)
Source: BP Statistical Review of World Energy 2019, US EIA
1 2007-2008 Global financial crisis: Price of oil underwent significant decrease after record peak in July 2008 up to Feb. 2009.
2 Libya Civil War, 2011: Oil production was curtailed in Libya. Despite Saudi assured an increase in production to counter shut downs, sour type oil of Saudi could not replace sweet Libyan oil resulting an increase in oil prices.
3 2015 supply glut: From 2014 until 2016, crude price decreased mainly due to increase in production of nonOPEC oil, mostly the US shale oil. OPEC nations increased production to maintain their market share. Decrease in demand from China was also noted during the period.
4 Saudi Arabia vs Russia price war: In Sep. 2016, Saudi Arabia and Russia agreed to cooperate in managing oil price forming informal alliance of OPEC+. On 5 March 2020, OPEC summit agreed to additional production cut that was not agreed upon by Russia.
4 COVID-19: During Nov./Dec. 2019, the first case of COVID-19 virus was reported in Wuhan, China. By Feb. it spread across 213 countries. Oil prices were hit due to an increase in production by OPEC+ lead by Saudi Aramco and rapid fall of demand due to the pandemic.
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Impact of COVID-19 on O&G industry
Crude oil prices fell during February to May 2020 Crude oil prices $/bbl 80
23 Jan., lockdown in Wuhan, China
20 March, stay at home orders in NY, USA
60 25 March, countrywide lockdown in India
40 9 March, OPEC+ negotiation fallout
20 0 Jan - 20
Dec - 19
Feb - 20
Mar - 20
-20
Apr - 20 Brent
May - 20 WTI
-40
Share of major oil consuming countries in 20191
Lockdowns and social distancing measures across the globe2
US China
19%
India
34%
Japan 15%
4% 4% 3%
16%
5%
Saudi Arabia Russia
• Several countries have responded by implementing a lockdown and closure of workplaces to combat COVID-19 pandemic. • Top 12 countries that are/were under lockdown (ranging from 6 to 12 weeks) are responsible for ~61 percent of crude oil demand.
Europe Rest of world
Total oil consumption in 2019 is ~98.2 Mn BOPD
Country
Lockdown start date3
China
23 Jan.
Italy
9 March
Spain
14 March
France United States of America
17 March 4
20 March
Germany4
22 March
UK
23 March
India
24 March
Russia
31 March
Saudi Arabia
6 April
Note: [1] Source: BP global statistical review [2] Source: Rystad Energy research and analysis [3] United States of America and Germany was not under complete lockdown, businesses were closed 02
Impact of COVID-19 on O&G industry
Global oil demand is expected to pick up slowly Factors driving oil price
Way forward for O&G Fall in global crude oil demand (Mn BOPD)1
Fall in demand
Lockdowns and closure of businesses resulted in oil demand falling from 100 to 73 Mn BOPD in April1
-1 -7
-9
-6
-3
-1
0
-12 -16
-16 -20
Lack of storage space
Technical complexities in plugging of wells
Supply glut has filled up 76 percent of crude storage facilities in Cushing, Oklahoma USA, where crude oil is delivered per contracts. Lack of storage space and pipeline transmission capacity has pushed up storage costs forcing contract holders to sell WTI contracts at negative prices.
Reducing supply by temporarily plugging off wells is a complex job with high degree of impact on reservoir health and is also expensive and a tedious process. So operators continue to operate wells at losses.
Actual
Projected
-27 Jan Feb Mar Apr May Jun
Jul
Aug Sep Oct Nov Dec
Oil demand likely to reach 2019 level post December 2020 only • OPEC+ Russia agreed on 12 April to cut production by 9.7 Mn BOPD. • Wells with low technical risk (For example, oil sands in Canada, may shutdown ~2 Mn BOPD production in April/ May1) are expected to shutdown. • Smaller players are expected to stop production activities due to scarcity of liquid funds in the near term. • Number of active drilling rigs have come down to 465 from 991 in USA 2 on a Year-to-Year (YoY) basis, reducing exploration and well development. • Easing of lockdown measures and plans of revival of economy are expected to push the O&G demand.
Source: [1] Rystad Energy research and analysis; [2]: Baker Hughes
On go forward prices, crude oil prices would depend on demand recovery and OPEC+ commitments on agreed productions cuts. Per experts, prices are likely to remain range bound, i.e., between USD 35 and 45 per bbl.
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Impact of COVID-19 on O&G industry
O&G industry: India statistics Lower crude prices has dried up revenues for oil exporters; and oil importers cannot gain due to lower demand due to the pandemic Consumption of petroleum products 20
Million metric tonne
18
3
3
1 2
1
3
3
10
2
2
1 2
8
2
2
7
7
16 14 12
2
6 4 2 -
HSD
Jan-20 LPG
2 1 1 1 2
2
6
Feb-20
Petroleum coke
Apr-20 MS
1 2 2 2
6
3
Mar-20
3
3 1 2 1 2
6
May-20 June-20
Naphtha
Others
Source: Petroleum Planning & Analysis Cell
Crude Oil Price (Indian Basket) 70
USD per barrel
60
64 55
50 40
41 33
30 20
31 20
10 -
Jan-20
Feb-20
Mar-20
Apr-20
May-20 June-20
Crude Oil Price (Indian Basket)
Source: Petroleum Planning & Analysis Cell
04
Lower consumption and prices have provided an opportunity to build strategic reserves • Consumption for the month of March and April 2020 was down 12 percent and 38 percent from previous months due to nation-wide lock down implemented to contain the spread of coronavirus. • Consumption has increased in May 2020 and June 2020 due to relaxation in lock down effective 8 June 2020 (Unlock 1.0) by the Indian government. Consumption increase was primarily due to increased demand of diesel and petrol. • India has used lower crude prices as an opportunity to build strategic reserves. Per union minister, India stored oil (including oil carried by private players) account for ~20 percent (39 MMT) of India’s annual consumption. • India plans to increase strategic storage capacity by 6.5 MMT over the next few years. India parked around 8.5-9 MMT of oil on ships in different parts of the world, primarily in the Gulf region during the lockdown to take advantage of lower crude prices.
Consumers are not likely to benefit from lower crude oil prices • Reduction in crude prices has not resulted in equivalent reduction in retail prices of HSD and MS in India due to increase in indirect taxes by the Central and State Governments (refer below for details of the excise duty hikes since 1 March 2020). –– 14 March: Excise duty on petrol, diesel hiked by INR 3 per litre –– 6 May: Centre raises excise duty on petrol by INR 10 per litre, diesel by INR 13 per litre –– Respective state governments have also increased VAT on petrol and diesel • Estimate of the additional government revenue cannot be made as the consumption of petrol and diesel has dropped to 35-40 percent. • June 2020 onwards increase in prices of crude has been passed on to consumers by revision in retail prices. Since 7 June 2020, OMC’s have resumed daily oil price revision.
Impact of COVID-19 on O&G industry
Scenario analysis on COVID-19 affected businesses in India Multiple scenarios evolve based on efficacy of healthcare response and speed of government policy, support, and stimuli Sustained containment Scenario 1: The V-Curve
Time
Extent and speed of government policy
Reactive and limited
Economic growth
Scenario 3: The L-Curve Long-term disruption; severe, permanent loss
Economic growth
Short-term disruption; moderate, contained loss Time
Support, stimuli, and execution
Proactive and significant
Scenario 4: The W-Curve Economic growth
Economic growth
Medium-term disruption; significant, contained loss
Efficacy of healthcare response
Scenario 2: The U-Curve
Scenario analysis
Time
Of the four scenarios, the following are more likely to occur: • Scenario 2: Slow, tenuous recovery in early period of FY2022 with easing of lockdown measures by Q3 FY2021 • Scenario 4: Partial removal of lockdown and subsequent outbreaks, movement restrictions continue for up to two quarters with major hotspots under prolonged lockdown, businesses resume in phased manner and recovery kicks in only in Q3 of FY2022
Medium-term disruption; significant, recurrent loss Time
Uncontrolled spread
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Impact of COVID-19 on O&G industry
Impact of COVID-19 on O&G industry Different segments will have varying impact of COVID-19 Disruption scenario
Scenario description
Scenario 2
Scenario 4
Slow, tenuous recovery in early period of
Partial removal of lockdown and subsequent
FY2022 with easing of lockdown measures
outbreaks, movement restrictions continue for
by Q3 FY2021
up to two quarters with major hotspots under prolonged lockdown, businesses resume in phased manner, and recovery kicks in only in Q3 of FY2022
Sector impact
• Upstream: Falling oil prices due
scenario, resulting in prices staying ~USD
contraction. Prices remain ~USD 35-
20-25/bbl (Brent) resulting in severe stress
45/ bbl (Brent). Impact on new CAPEX
on the financials of companies. All CAPEX
programmes. Company financials to be
programmes frozen except vital reservoir
under some stress.
maintenance. Severe cost reduction
• Midstream: Falling gas prices, resulting in many players in the value chain invoking force majeure clauses to
programmes underway. New explorations set back by 2-3 years. • Midstream: Continued fall in price. 35-40
get out of take-or-pay clauses, 25-30
percent reduction in asset utilisations.
percent reduction in asset utilisations.
Companies will get severely stressed, need
Company financials to be under some
regulatory intervention to resume from the
stress.
contractual logjam.
• Downstream: Demand contraction
• Downstream: Extensive portfolio re-
impacting refining throughputs, but
alignments, channel un-viability resulting in
lower crude prices. Stressed GRMs , as
ROs and other PoS shutdowns. All new CAPEX
refiners will need to modify product
halted. Financials of companies come under
slates. Channel members will need
stress.
credit support to survive. Ongoing projects will need some interventions to minimise contractual logjams.
06
• Upstream: Extended period of low oil price
to global oversupply and demand
Impact of COVID-19 on O&G industry
O&G industry: Post COVID-19 Possible approach for O&G industry players Contract renegotiations Reviews of contracts to renegotiate quantity, tenure, and prices
Revisit long-term strategy Undertake scenario planning and finalise strategic options in Line with energy transition
Company responses
Demand shifts Align portfolio to meet demand changes, e.g., cheaper oil may reduce shift to gas, ATF demand destruction may lead to refinery reconfigurations
Business, financial, and asset restructuring Corporate restructuring, financial/debt restructuring, M&A, distressed assets, hive-off of non-core assets, to manage debt and cash flow
Cost optimisation opportunities Cost reduction across multiple areas such as operating costs, taxation, financing costs, etc. and potential supply chain impact/optimisation Regulatory and policy interventions Government may accelerate energy investments, e.g., XI round of CGD bidding and release new regulations policies to revive growth in the sector
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Impact of COVID-19 on O&G industry
Contact Us
Rajesh S Shetty Partner rshetty@deloitte.com
Ashwin Jacob Partner ashwinjacob@deloitte.com
Acknowledgements Sumit Goyal Ranjit Sodha Ankit Bhansali
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Impact of COVID-19 on O&G industry
References • Petroleum Planning & Analysis Cell (Ministry of Petroleum & Natural Gas, Government of India)-www.ppac.gov.in • Ministry of Finance notification-http://egazette.nic.in/WriteReadData/2020/219299.pdf • BP Statistical Review of World Energy 2019 • Closing oil price data-market.businessinsider.com • https://www.argusmedia.com/en/news/2108783-india-plans-to-store-crude-in-the-us • https://energy.economictimes.indiatimes.com/news/oil-and-gas/opinion-covid-19-impact-on-the-oil-gas-industry-aperspective/75726882 • https://energy.economictimes.indiatimes.com/news/oil-and-gas/covid-19-impact-cgd-firms-concerned-over-force-majeuredemand-destruction-and-labour-shortage/75493053 • https://www.reuters.com/article/us-gasoline-asia/lackluster-gasoline-naphtha-markets-pummel-asian-refining-marginsidUSKCN1SG0E7 • https://economictimes.indiatimes.com/wealth/fuelprices/fuel-petrol,citystate-mumbai.cms
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Impact of COVID-19 on O&G industry
Glossary ATF
Aviation Turbine Fuel
Bbl
Barrel of Oil
BOPD
Barrels of Oil Per Day
CGD
City Gas Distribution
GRM
Gross Refining Margin
HSD
High Speed Diesel
M&A
Merger and Acquisitions
MMT
Million Metric Tonnes
Mn Million MS
Motor Spirit/Petrol
O&G
Oil & Gas
OMC
Oil Marketing Companies
OPEC
Orgaization of the Petroleum Exporting Countries
PoS
Point of Sale
ROs
Retail Outlet
USD
US Dollar
WTI
West Texas Intermediate
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