COVID-19: The Next Episode For Oil & Gas
find how the coronavirus (covid-19) pandemic will likely spell out a new era
for the oil and gas industry.
Oil prices have improved to around $22/barrel, but that's not high enough to sustain a viable domestic energy industry. As everyone by now knows, prices have fallen to this level due to the tremendous drop in oil demand caused by the coronavirus pandemic response, and the higher prices needed to restore oil industry economics requires a closer supply-demand balance. Although the future is always uncertain, we know a few things that can inform our outlook.
The Equation is Unchanged — We know a lot more about the coronavirus than we did a few months ago, but the fundamentals are unchanged. It's a highly contagious disease with no cure, treatment or vaccine; has significant mortality; and no one has immunity. It has spread around the world in a very short time and occurs virtually everywhere.
Extreme Measures Slowed, But Didn't Stop the Spread — The widespread application and adherence to "stay at home" orders, business closures and social distancing worked to significantly reduce the spread of the disease. Even so, the U.S. is still experiencing an estimated 25,000 new cases a day and nearly 2,000 deaths. In about two months, there have been nearly 70,000 deaths directly attributed to the virus, and unexplained spikes in total deaths suggest the number is higher.
Patience is Wearing Thin — Some people are unwilling or unable to maintain these practices. Many states and cities are easing restrictions, and many people just want to get back to normal.
Cases Predicted to Rise — Models differ in their values, but they point the same direction. As businesses reopen and people move about more freely, cases and deaths are expected to increase. Scattered spikes and outbreaks can be expected and rural areas will start to see greater impacts.
Road & Air Travel Likely to Remain Depressed — If cases rise as predicted, expect many people to continue to work from home and business travel to remain low. Since transportation fuels are the primary use of oil, we can expect demand to improve, but not back to their previous levels for some time.
Production Is Declining, But Not Productive Capacity — Oil production is declining as global producers shut in wells. Some shut-ins are in response to poor economics, but most are due to a lack of storage capacity. Shutting in wells reduces production rate, but not the capacity to produce. Until the impact of reduced drilling and natural decline reduce productive capacity, there'll remain barrels readily available to meet any increase in demand. We should expect this supply overhang to keep prices depressed until it's resolved.
About the Author:
Steve Hendrickson is the President of Ralph E. Davis Associates, an Opportune LLP company. Steve has over 30 years of professional leadership experience in the energy industry with a proven track record of adding value through acquisitions, development and operations. In addition, Steve possesses extensive knowledge of petroleum economics, energy finance, reserves reporting and data management, and has deep expertise in reservoir engineering, production engineering and technical evaluations. Prior to joining Opportune, Steve was Principal of Hendrickson Engineering LLC, a licensed petroleum engineering firm focused on reserves assessment and property valuation supporting property acquisitions and corporate restructurings. Steve began his career at Shell Oil as an engineer in Permian Basin waterfloods and CO2 floods. Since then, he has focused on leading upstream oil and gas reserves evaluation/engineering projects serving in management or as an executive at several E&P companies, including El Paso Production Company, Montierra Minerals & Production LP and Eagle Rock Energy Partners LP. Steve is a licensed professional engineer in the state of Texas and holds an M.S. in Finance from the University of Houston and a B.S. in Chemical Engineering from The University of Texas at Austin. He currently serves as a board member of the Society of Petroleum Evaluation Engineers and is a registered FINRA representative.