Reeling under a global health emergency, people across the world wait in anticipation to see the chain break. Concerted efforts are being made by a unified force in every sphere to eradicate the novel coronavirus pandemic from the face of the earth. However, this task seems daunting and time-consuming. In fact, no sector Or could escape this fast-evolving deadly virus, especially the energy space.
Oil Price Plunge
The price of West Texas Intermediate (WTI) crude has declined more than 34% since the beginning of 2020. Strict lockdown measures to contain the spread of COVID-19 dented global energy demand, thereby dragging the oil price down. Along with the commodity price slump, the Zacks Oil-Energy sector has declined 45.1% year to date against the S&P 500 Index’s 0.8% rise.
Moreover, oil prices are unlikely to improve any sooner as commercial passenger flights remain curtailed. Particularly, the usage of distillates, such as aviation fuel continues to be weak with air travel essentially remaining tepid. As long as the coronavirus outbreak continues (as is the case now in India and a second wave spreading across Europe), there will be pressure on the demand side of the equation. Per the International Energy Agency (IEA), the degree of recovery in oil consumption is expected to decelerate through the remainder of this year, driven by localized lockdowns and containment measures to tackle the recent spike in COVID-19 cases.
Crude Crash Intensifies Offshore Industry Struggles
When oil was trending in the triple-digit territory during 2014, energy companies had billions reserved for exploration budgets. This aggressive approach was essentially in response to the fluctuating commodity prices and severely-affected balance sheets when prices fell to a 13-year low of around $26 per barrel in 2016. With operating profitability being compromised, the worst oil price rout in more than half a century triggered a major restructuring in the companies’ long-term focus. Most producers grew cautious by shunning large, capital intensive projects.
Precisely, the dwindling price forced top energy players to cut spending due to costly offshore drilling projects on account of squeezed profit margins. Most offshore drilling stocks lost billions in market value during this period.
Barely had they overcome the oil price plummet when the coronavirus outbreak struck them hard, further aggravating their woes. The pandemic induced an unprecedented sell-off of the commodity of oil. On a worrying note, with major cities on lockdown and travel restrictions in place, the consumption for crude is set to take a substantial beating. Global efforts to combat the adverse COVID-19 impact and rev up the economic activity have been partly effective. The virus-inflicted demand slowdown induced a massive oil sell-off, forcing E&P players to take a relatively conservative approach to capex programs, thereby scrapping contracts with many offshore drillers. Many oil producers are withdrawing from endeavors that require oil to be pegged at $60 per barrel to make a profit and this could take long enough time before the actual price is achieved again. Big oil companies like Chevron CVX, ExxonMobil XOM and Royal Dutch Shell RDS.A abandoned drilling deals earlier this year to preserve liquidity and add shareholder value. Offshore commitments are now estimated to be $34 billion in 2020, substantially lower than $101 billion reported in 2019.
Oil Project Sanctions to be Restored 2022 Onward
Per a recent Rystad Energy analysis, the coronavirus-borne crippling economic scenario hampered oil and gas project sanctioning this year, causing total committed spending to decline to around $53 billion from the year-ago spending of $190 billion.
However, the analysis further shows that the total sanctioning is anticipated to bounce back to around $100 billion in 2021, primarily backed by offshore projects, which are valued at $64 billion for the year. Moreover, postponed plans will lead the total worth of final investment decisions (FIDs) to exceed the pre-pandemic levels from 2022.
The consultant firm also modified its 2020 offshore sanctioning total to $34 billion from the prior projection of $26 billion. This upward estimate revision was a result of the Mero-3 sanctioning in Brazil, which is expected to cost $2.5 billion to first oil. Last month, TOTAL SE TOT along with its partners in the Libra Consortium took a decision to launch the third phase of the Mero project (Libra block), located deep offshore, 111.8 miles (180 kilometers) off the coast of Rio de Janeiro. The Libra Consortium is operated by Petrobras PBR that holds 40% interest.
Of late, the Norwegian Ministry of Petroleum and Energy sanctioned the plan for development and operation (PDO) of the Balder Future project. The $2-billion development plan comprises advancement of the Jotun floating production, storage and offloading (FPSO) vessel, which will operate between the Balder and Ringhorne fields. While Worley upgrades the FPSO, Baker Hughes BKR and Ocean Installer are in charge of supplying the subsea amenities.
Lastly, China Offshore Oil Engineering Company informed about the commencement of development activities at the currently Zacks Rank #2 (Buy) CNOOC’s CEO Luda 6-2 oilfield. The Luda 6-2 development is estimated to cost nearly $170 million in greenfield commitments. The oilfield located in the Bohai Bay, offshore China, is expected to begin production in early 2022. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Looking ahead, even as crude shows signs of a turnaround from the coronavirus-induced downturn, it won’t be before 2022 that the oil and gas project sanctions could be recovered to the pre-pandemic levels. The offshore projects are expected to be at the forefront in effecting this rebound.
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CNOOC Limited (CEO) : Free Stock Analysis Report
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