The ongoing COVID-19 pandemic is forecast to wreak long-term disruption in the energy market, bringing heightened volatility to energy consumption patterns, and oil and gas, according to a report released by Moody’s Investors Service on 24 August.
The global economic recovery as countries emerge from the health crisis is expected to be irregular, setting energy companies on course for a bumpy ride that will serve to highlight disparities between “strong and weak” energy firms.
"The coronavirus pandemic has extended the slump in oil prices and, in turn, amplified disparities between stronger and weaker exploration and production companies," said Steven Wood, managing director with Moody's Corporate Finance Group.
Measures to adjust product mixes, “redouble” efforts to reduce breakeven production costs, while slashing their carbon footprint are some of the moves large integrated oil and gas companies are anticipated to explore.
"Well-capitalized E&P (Exploration and Production) firms and oil majors will consolidate their US shale assets, while the number of highly leveraged companies will shrink amid waning support from banks and investors,” says Wood.
As the crude glut continues amid the pandemic and its disruptive impact on the energy sector, cheap fuel prices are expected to no longer stimulate demand for refined products.
A recovery in fuel demand will be contingent on economic growth, and on the strength of the markets for particular refined products, says the report.
The refining margins, estimates the report, will improve in sync with demand in 2021, while likely remaining below mid-cycle levels.
"Decreasing volumes of oil and gas will lead to an inflection point in the midstream sector's cash flow, as E&P customers slash capitals pending and renew or renegotiate contracts. Rising regulatory scrutiny will make it harder to win social licenses to build interstate pipelines and other large projects, slowing investment, and companies will increasingly need to finance themselves as capital access tightens," said the Moody’s Investors Service assessment.
Looking ahead, revenues of national oil companies are forecast to recover over the next two to three years.
While it is challenging to predict the extent and speed of the recovery, experts suggest that the post-pandemic market rebound of the global oil and gas industry will hinge on a succession of factors.
Policy actions adopted by specific governments will factor in to a large degree, determining the timeline for economic activity returning to normal.
A gradual increase in demand can be anticipated to follow in the wake of economic activity picking up pace, particularly in China, Southeast Asia and the US, said Moody’s.