Covid-19 and the petroleum sector
PAUL Barker, the executive director of the Institute of National Affairs, shares his thoughts about the drop in global oil prices and the impact of Covid-19 on the country’s petroleum sector and other export commodities.
“Oil prices dropped severely from US$120 (K403.7) a barrel (rent crude) in early 2012 to a low of US$30 (K100.90) a barrel by January 2016, before recovering steadily to a peak of US$80 (K269) in October 2018.
Since then, it slipped back but remained above US$60 (K201.80) barrel until January 2020, when an apparent oversupply and weakening prices pushed Opec (Organisation of the Petroleum Exporting Countries) members to push to limit supply to drive prices back up.
That exercise not only failed to gain agreement, partly in view of fear of the actions of the non-Opec members that have become increasingly major suppliers.
Instead, Saudi Arabia and Russia, two of the largest global oil and gas producers, indicated a major increase in supply, apparently to try and squeeze out the higher cost producers, notably the frackers and other unconventional suppliers. Prices fell heavily.
Then the coronavirus kicked in, slashing demand for energy in transport and industry, first in China and then other parts of the developed economies.
The price of oil and to a lesser extent gas tumbled.
With Brent crude falling below US$30 (K103)/barrel, and even slipping below US$20 (K69)/barrel for some days.
The share price of the major and minor oil companies slid heavily and some higher cost oil projects restrained production or were temporarily shelved.
Oil companies were desperately avoiding selling oil at prevailing spot prices, and, with storage at capacity, searched out empty oil tankers, not to deliver, but to store oil, hoping to sell in the future at higher prices.
Commodity Markets relevant to PNG April 8, 2020, – (INA – April 8, 2020). As an update, here are crude oil price and LNG prices pertinent to PNG (data from various sources, including ICO, ICCO, Index Mundi, LME, Market Insider, Business Insider, Oil Price.com)
A substantial differential developed between current and future prices. Major oil companies tend to take a longer term perspective when it comes to planning major resource developments.
Currently, oil and gas prices are still forced down by Government-imposed restraint on economic activity and, therefore, demand, so there’s not the normal demand response to the low prices.
With China now cautiously moving out of Covid-19 lockdown, and expected wider recovery of economies over the next months, if virus control measures are successful, demand for energy will pick up again.
East Asia, including China, are seen to be the main market for PNG LNG, and China’s demand will invariably be strong, and with an increasingly focus on cleaner energy.
Gas is widely considered an intermediary stepping stone, as China shifts from its heavy dependence upon high emission coal to clean energy, and PNG, which has demonstrated itself to be competitive in production and shipping costs, is still an attractive supply source.
It’s tougher for the smaller companies, especially more geographically focused, like Oil Search, which is only operating in PNG and Alaska.
It’s largely dependent upon an aging oil resource, its share of PNG LNG production and the development prospects in major further LNG projects, which have been long drawn out.
With the major fall in revenue from oil and to a lesser extent gas (as gas prices have been somewhat shielded by longer term supply contracts) and the lower share price, but continued operating and development costs, it will need extra capital to remain at the table for these planned developments.
It will be seeking capital from existing shareholders to retain independence, and to seek to ward off the prospect of uninvited takeover steps.
With the price low, some might see this as an attractive opportunity to get in there.
How the market judges it and who actually acquires the equity, and whether it does entail any shift in the composition of ownership will be interesting to observe.”