Handelsblatt (Germany): oil companies face the greatest challenge

Just four years after the last crisis of the once “big oil industry” faced the greatest challenge in its history. The mechanism of the profit from the commodity giants stalled. So much so that even the head of the oil company with the largest turnover in the world can no longer hide it.

“Fuel consumption in the long term will be less than before the crisis, even when the pandemic coronavirus will be behind us. The decline will continue for many years”, — said the head of Shell concern, Ben van beurden, a few days ago in an interview with oil expert Daniel Ergina.

Large debts, low commodity prices and attempts to get consumers to bet on renewable energy have long put pressure on the industry. But coronaries all these domestic problems escalated and became a real challenge for the “big oil industry”.

While large corporations face a profound challenge: when the price of oil about $ 40 per barrel of North sea Brent crude for almost half of the world’s oil fields have become unprofitable. Experts believe that prices in the long term will rise, but this is controversial. Even leading multinationals can no longer ignore the threat.

Therefore, the British oil giant BP has changed the calculation of long-term oil prices down to 55 dollars per barrel of Brent oil up to 2050. A few months ago a London-based company still hoped for an average price of $ 70 in the next 20 years.

For BP, this means $ 17.5 billion of writedowns in the second quarter. Shell has also adjusted its prices and is forced to write off 15 to 22 million dollars. U.S. competitor Chevron in November conducted a price adjustment, which resulted in the devaluation of almost 11 billion.

The demand in the long term will remain low

“They will be followed by others, — I am sure an oil expert Walter Pfeiffer from the consulting company Roland Berger. — Oil companies are in a difficult situation. Because of the danger of the second wave of the virus falling demand, it seems to last longer than expected”. He explains this radical step concerns.

Since the beginning of the pandemic in the fashion industry, the oil industry is faced with unprecedented challenge: as the industry slowed down, and transport was used much less, the demand for major energy carriers fell sharply. The decision of the Association of oil producing countries and OPEC Russia+ last week gives hope that the decline in production to 9.7 million per day from August will gradually come to naught.

However, the International energy Agency warned that the pandemic continues to hang over the future of the global oil market. “The high number of cases covid-19, which in some countries continues to grow, is a scary reminder that the pandemic is still not under control”, — experts warn the Agency.

For the oil industry effects will be felt right up to the coronavirus came under pressure. The price of oil and gas was extremely low before the crisis of oil and gas in the world was produced more than they consumed. Too much oil on the market pulls down the price: the price of a barrel of Brent last year fell by more than 20%.

Even worse is the situation in the gas market. Particularly hard hit LNG in 2019, prices have fallen by almost 40%.

The exchange of blows between the oil giants of Saudi Arabia and North America has greatly exacerbated the situation. The fall in oil prices continued. When then due to coronavirus demand fell first in China and then the rest of the world, it’s impact on prices. In April, the price of us crude in the derivatives market for the first time in history left in a minus. From this point one shock followed another.

Industry giant Shell for the first time after world war II decided to cut dividend payments. Investors will now receive a quarterly payment of $ 0.16 dollars — two-thirds less than before.

BP announced the reduction of 10 thousand of the 70 thousand jobs worldwide and sell all petrochemical unit for $ 10 billion to provide Finance.

Record debts in the second quarter

A total of seven of the largest corporations — Shell, Exxon Mobil, Chevron, BP, Total, Eni and Equinor in the second quarter of accumulated debts amounting to $ 60 billion. This assessment has published for the us Agency Refinitiv. In other words, new debt of corporations represent almost half of all debts in the global oil and gas industry.

Most borrowed BP $ 16 billion. “The situation in BP is now particularly bad,” says industry expert Parul Chopra from consultancy Rystad Energy. After the accident at the Deepwater Horizon well in the Gulf of Mexico in 2010, BP is still paying billions of dollars in debt.

“So they have postponed many projects for several years, but in 2014 again they continued, says Chopra about the special position of the British group. — To do this, BP has taken a new loans because in the long term relied on higher price of oil. Some of the projects were launched only in 2019. And then began the coronavirus”.

But other oil concerns, the situation is tense. The “supergiant” used the crisis to radically reduce the cost of production and to abandon non-profitable sectors. According to the American Bank Goldman Sachs, the cost of the “big five” in this way has halved since 2013.

“For us it is not about volume, but about quality” — repeat, the head of BP, Bernard Looney, the head of Shell’s van beurden. “Let $ 40 per barrel and a bit, but there are some oil and gas portfolios, which in this situation are profitable,” — said the expert Pfeiffer.

Different situation in the North American precingular companies. Although the situation with the American WTI at a price of about 42 USD slightly improved, many shale companies with large debts are in a very difficult financial position.

Since precingular boom in 2012 in the hope of rising prices for the oil they took out more loans to Finance costly mining method. But after the collapse of prices in 2014, many more do not have the financial cushion to survive a second crisis.

More than 20 North American oil producers, according to the American law firm Haynes&Boone, has already declared bankruptcy this year. They will be followed by others if oil prices remain at current levels.

Despite the austerity course, some oil companies use the chance and make the acquisition deal. On Monday Chevron announced the acquisition of a rival Noble Energy for $ 5 billion. Including a high debt Texas company, the transaction value amounted to 13 billion.

This is the largest acquisition in the industry since the beginning of the pandemic coronavirus. The major players in this situation will not break, I’m sure Pfeiffer. “But the change in the industry is becoming increasingly tense because the company was in a difficult situation.”

While oil giants have one crisis after the other, the energy world is in transition to renewable energy. Although energy demand in the world continues to grow, the demand for fossil energy carriers in the context of combating climate change will be reduced. Know this, and the oil companies. If you had to say about the so-called “the end of natural oil deposits,” today the industry only talks about the “collapse of demand”.

Pressure on European concerns

While American oil companies such as Exxon Mobil and Chevron, focused on the extraction of fossil raw materials, Europe is more pressing requirement of the transition to more environmentally friendly types of energy. Shell, BP, Total, Italian Eni and Norwegian Equinor promise by 2050, to negate the impacts on climate.

Although oil and gas production continues, billions will be spent on the development of renewable sources of energy. Oil companies are particularly interested in the areas of “green” hydrogen, synthetic fuels and bioenergy.

Last week, the Association of the European oil economy Fuels Europa presented in Brussels the appropriate concept. “At the latest by 2050, each liter of liquid fuel for transport is to have zero carbon footprint, and thus it will be possible dessiminate air, sea and road transport,” — said the head of Europe Fuels John Cooper.

To move towards zero impact on the climate of the planned investments in the amount of 650 billion euros.

“While the oil companies from the US have not yet adjusted long-term strategy, the European oil companies are proactive and talk openly about the transition to renewable energy” — says the analyst Chopra. However, the big difference between a multi-billion dollar corporations in the coming years will not.

“All the major players a lot of pipeline projects, and they don’t expect quick changes,” — said the expert. In the end, this is a very large company, and the transition will take a long time.