COVID-19 - Preparing for the new normal in Oil & Gas


COVID-19 - Preparing for the new normal in Oil & Gas

As the oil executives of India’s major oil companies met in mid-March, they were looking back at yet another year of growth in the demand for oil. Looking ahead, they likely had some apprehensions about pace of economic growth. However, the possibility of seeing the first contraction of oil demand in nearly half a century may not have crossed their minds. The next couple of weeks brought an unprecedented situation. The demand for transport and industrial fuel didn’t just soften; it contracted sharply in most parts of the world. Refineries and supply chains were forced to slow down. Meanwhile, India’s domestic liquefied petroleum gas (LPG) consumption shot up as the country went under lockdown and nearly everyone stayed home— forcing more imports of an already import-dependent product. Suddenly, a supposedly China-focused first-quarter problem had landed in India’s own backyard.

Meanwhile, in just a few weeks, the global implications of the pandemic became clear. Demand crashed—down by an estimated 30 percent in April—and OPEC supply management, which in previous crises were enough to stabilize oil prices, barely made an impact. Global oil prices are at astonishing lows. Capex spending is being slashed in a sign that global oil companies expect soft prices to continue. In the short term, companies’ focus will need to shift to cash management and meeting debt obligations. However, in the long term, forward-thinking boards will ask themselves where capital can best be deployed: in the oil value chain (and if so, at what crude reference price) or outside. The debate about when peak oil consumption will be reached has intensified, though no guarantees that we haven’t reached it already.

After enjoying decades of growth in the demand for oil, India now finds itself in uncharted territory with the pandemic-induced lockdown. In the third week of April, industrial and transportation fuel demand were 50 to 70 percent below normal—forcing refineries and supply chains to back down. Demand for non-essential oil products such as lubes and bitumen has been decimated during this period. Even in this highly uncertain environment, operations still need to run and crucial decisions still need to be made. So which market parameters should oil companies focus on over the next few weeks and months? To gain a clearer picture, we explored how COVID-19 could impact India’s oil demand over the next few quarters and the next two to three years deploying scenario planning techniques modelling different recovery scenarios across on various end-use segments.

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