How can oil price volatility impact on investments in the O&G – oil and gas – sector?

The current situation on the planet points to a future of challenges and uncertainties in productive and service markets of all kinds. As a sector that serves as an energy base for all of them, the Oil & Gas industry (O&G – Oil and Gas) must go through yet another hard time of oil price volatility.

What history tells us is that it is possible to prepare for these scenarios and plan a positive outcome in the face of crises. Therefore, so that you can better understand this relationship, we invite Professor and Researcher at FGV Energia, Fernanda Delgado, to talk about causes, consequences and how the sector strives to get out of this very critical moment. Follow.

What factors impact on oil prices?

Every commodity has its price regulated by the law of supply and demand. Oil auctions are a perfect definition of this truth. However, as Fernanda starts by explaining to us, there is a particularity in the sector given, mainly, by its importance.

Not only markets, but governments also influence this value. Geopolitical forces can impact import and export agreements, coalitions, breakdowns and even wars – as has happened in the past.

Therefore, those who deal with the sector need a much more comprehensive view than just the current demand for the input. The teacher gives an example of the power of international relations in this scenario:

“At the meeting between OPEC – Organization of Petroleum Exporting Countries – and Russia, on March 6, what was expected was a consensus for a production cut that would drive prices up. But a detachment of intentions led to a diametrically opposite direction, in which Saudi Arabia decided to flood the market with an even greater amount of oil produced. Prices reached around 20 dollars a barrel, the lowest value in 18 years. ”

What were the main swings in recent years?

It is clear that we are currently experiencing one of those major oscillations for producers and the entire Oil & Gas chain. And to get through it, it is important to understand the causes and effects of similar or more recent analogous moments. For this, we asked the professor at FGV Energia to mention the most important in recent years.

2008

The so-called subprime crisis in the United States affected the entire market, including oil. This, however, is a moment of recovery considered rapid.

“A super cycle in the value of commodities has caused oil to appreciate at more than US $ 100 a barrel, including there the explosion of demand in emerging countries,” says the expert.

2011

What triggered the 2011 oscillation was the so-called Arab Spring, a series of revolts and civil wars that interrupted the flow of production in Libya. In this case, there was also a significant increase in prices due to reduced supply.

2014

More recently, the drastic drop in prices between 2014 and 2015 was motivated by the revolution of shale gas (shale gas) in the USA. There was an explosion of supply in the market and expectations about the country’s ability to realize this potential with investment in infrastructure – becoming an oil exporter, something unthinkable until recently.

2020

The year 2020 begins with a historic oscillation and an unprecedented scenario for the O&G market. As we have already mentioned, the price of the barrel reached very low prices due to a drop in demand that no company or country could prepare for.

Measures to restrict social and human traffic to mitigate the contamination of Covid-19 have greatly reduced the use of the energy matrix. It is a time of uncertainty and preparation to overcome challenges.

That’s what the teacher points out. According to her, it is not yet possible to conclude whether there is a new structure in force with structurally depressed prices. “The hope is that there will be a clearer outlook from the OPEC meeting on June 5.”

How does this volatility in oil prices impact investments in the sector?

The moment we are living in is perfect for studying containment and overcoming actions that companies are employing to adapt to the market – at least in the short term.

We asked Fernanda to give us an overview of how the big institutions in the market are dealing with such a sudden challenge:

Chevron: intends to reduce expenses and decrease production, with a 20% reduction in investments;

Equinor: cut investments, exploratory drilling and operating costs by US $ 3 billion, in addition to the suspension of the US $ 5 billion share buyback program;

Exxon: reduction of US $ 30 billion in investments in 2020;

Saudi Aramco: investment reduction from US $ 32.8 billion in 2019 to US $ 25 billion in 2020;

Shell: reduction of investments by US $ 5 billion and suspension of the US $ 25 billion share buyback plan;

Petrobras: reduced investments, cut operating expenses and postponed dividend payments.

In addition to these measures, the Brazilian company also reduced production by 200 thousand b / d, wages and employees’ working hours. It is a sign that the moment is for containment of expenses and readjustment of expectations to suffer the least possible impact before planning the next steps.

How do these investments, or lack of investments, impact the development of the sector?

There is no way around it: analyzing the numbers, the current scenario is of great difficulties for the oil sector. This will certainly delay the development of the sector. An example pointed out by Fernanda is the divestment plan in Petrobras refineries, which can be extended for a longer period.

Less demand and low prices mean less investment capacity in research. Petrobras itself works with an ideal balance of value between 35 and 45 dollars per barrel, far from what is currently being practiced.

It is also during crises that new opportunities arise. The investment in sustainable energy and productive efficiency in recent years has already started to take effect and may point to new paths for the sector in the near future.

Just as the market has recovered from the volatility of oil prices previously, there will be paths and courses that will become clearer as soon as the most critical moment passes.

And if there is a lesson for years to come and fluctuations, it is that investment in technology means intelligence to recover from thuds more quickly. This focus on disruption and efficient processes in the oil chain will be necessary as soon as the market recovers.

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