The petroleum production in 2020 and its tendencies

The Oil and Gas (O&) sector was one of the highlights in the news during a considerable period in 2020, as it was one of the most heavily impacted by the pandemic of Covid-19. However, with hard work and planning in the second semester, the production already shows signs of recovery.

But, what was the extension of this impact? How is the petroleum price volatility affecting the market? In order to have reliable answers for these questions, we have invited José Pedro Rangel de Almeida, co-founder if Lila (data refinery and analyst of O&G at Megawhat), to give some insights into the recent facts and talk about what is yet to come. Keep reading. 

The petroleum production status before the beginning of 2020

The O&G sector in Brazil and worldwide was experiencing a growing expansion before the beginning of 2020, as consequence of some factors, such as the demand of the Asian market and high competiveness in a prices war between the biggest world producers, as a result of investments in technology in the recent years. 

Our country is an example of this growth. In 2019, we reached the mark of 1 billion drums in one year for the first time – a growth of 7,78% when compared to 2018.

Based on 2019 results, it seemed that 2020 would be one more cycle of 12 months of evolution and production consolidation, but a worldwide event as never seen before was in the way.

The impact of the pandemic in the world production of petroleum

The first months of Covid-19 pandemic reverberated through all economic sectors, but in none of them it was so evident as in the O&G. Due to the lockdowns decreed in several countries and important cities, the demand for petroleum suffered a blow that could have never been predicted before the event.

José Pedro untangles the process that led to the fall in demands in a domino effect:

• consumers stopped filling their cars tank;
• gas stations stopped selling fuel, stocks increased and they ceased buying more products;

the distribution companies stopped selling, stocks increased and they also ceased buying from the refineries;

• the refineries stopped selling, stocks increased, they cancelled new orders of raw material;
• with high product offer, the market price structure favoured the “carry trade” – buy, stock and sell in the future;
• The increase of stocks on shore caused an accumulation of floating stock on VLCC ships and SUEZMAX.

The result of these events drew the attention of the media because of the impressive fall in the price per drum. In José Pedro’s point of view, some factors originated from the commercial war between the big producers, but the sudden and unprecedented fall in demand was a crucial aspect for the deepening of the crisis.

It was a heavy blow in a single moment, but it still causes other negative effects after a while.  For example, José Pedro points out that “we are more and more witnessing non programmed stoppages. In Brasil, 36 fields had the production interrupted with no prospects of returning. The production in shallow-waters suffers a cut of 62 platforms, most of them of fixed type.” 

The demand reduction led to an excess of stock, which entailed a revision of the oil production that is in course at this moment. It is a complex challenge that will require intelligence to enable a quicker recovery.

The process of recovery of the sector

We cannot say that it was a complete crisis for the O&G sector in Brazil, however. Even with the impact of the external market, the Brazilian Real devaluation and the new IMO 2020 legislation for sulphur emissions – that favours the quality of oil from the pre-salt – contributed to the increase of exports of our raw material.

Of course, the present scenario is far worse than ideal. There was, however, a certain stabilization of the sector in the second semester of 2020. And stability is the base needed to restore the production growth.

A the moment, important factors make market credibility a challenge. José Pedro points out the elections in the United States and the risk of a second wave of Covid-19 in the North Hemisphere as variables that make any projection uncertain.

However, the analyst sees some situations at this moment that may point to an important path in the future: “progress in the vaccine studies and new monetary packages can boost prices, but subject to a cooperation between producer countries, given an international repressed demand.

Prospects for the future

Speaking of what comes next, the major challenge today is to bet on when and how the O&G sector will recover. The way things will occur from now on will determine who will be strengthened or weakened in this dispute.

In the global scenario, the preliminary proposal is a union that may promote the recovery of the sector as whole. “We do not have a prices war, anymore, once countries are working together to cut production and keep up the price of the commodity”, José explains.

And even considering the uncertainties over the future, Brazil is one of the countries that has in hands the opportunity to convert such challenge into growth. It is the case, first of all, of the investments in the pre-salt rigs. “The chronogram of new FPSOs continues steadily and we will have more units in the forthcoming years. Buzios will be the main field responsible for this increase in production.” Petrobras’ business plan for 2021 and 2025, by the way, corroborates this expectation.”

Besides, José Pedro concludes his impressions talking about the modernization of the sector: “present scenario shows that the international oil companies are drilling in deeper and deeper waters, and one of the ways to finance this endeavor is decommissioning older platforms. This move opens room for more independent companies with leaner operations.

Therefore, the expectation for the future oil production all over the world is a resumption of its growth by an acceleration of changes in the sector – with new players and more technology combined with investments in the sustainable energy market.

Brazil has the potential to take part of this future as a consolidated and competitive market. The turn to 2021 may be the beginning of new era in our market. 

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