How the coronavirus pandemic is impacting oil companies

Price declines will lead to a decline in capital expenditure, as loans from banks become more difficult and costly to source

Fuel storage tanks stand at a PT Pertamina facility in this aerial photograph taken above Tanjung Priok Port in Jakarta, Indonesia on Tuesday, April 21, 2020. Bloomberg

A woman wearing face mask walks past a bank electronic board showing the Hong Kong share index at Hong Kong Stock Exchange Tuesday, April 21, 2020. Asian shares skidded on Tuesday after US oil futures plunged below zero. AP Photo

Oil pumpjacks are seen at the Huntington Beach Oil Fields on April 20, 2020 in Huntington Beach, California. Getty Images/AFP

Shell station employee J.W. West fills up a customers tank with gasoline in Mobile, Alabama, USA, 20 April 2020. EPA

A man walks past an electronic stock board showing Japan's Nikkei 225 index at a securities firm in Tokyo Tuesday, April 21, 2020. AP Photo

The sun sets behind smoke rising from the LyondellBasell-Houston Refining plant in Houston, Texas, on April 20, 2020. AFP

A staff member cleans an electronic stock board showing Japan's Nikkei 225 index at a securities firm in Tokyo Tuesday, April 21, 2020. AP Photo

An offshore platform near the Huntington Beach Oil Fields on April 20, 2020 in Huntington Beach, California. Getty Images/AFP

A kite surfer rides in front of a line up of ships on April 20, 2020 in Huntington Beach, California. Getty Images/AFP

A man sits next to the fearless girl statue next to the New York Stock Exchange on April 20, 2020 at Wall Street in New York City. AFP

The impact of Covid-19 on energy markets is a global issue that has caused a reduction in demand and the collapse of oil prices. Even without any reduction in output production, all oil companies, both national oil companies (NOCs) and international oil companies (IOCs), have lost 50 per cent of their revenue as the price of crude has fallen by over 60 per cent since the start of the year. This will lead to a reduction in capital expenditure, which is one of the biggest concerns for the long-term recovery of the industry after this crisis.

What we are seeing is that all NOCs and IOCs are slashing capex indiscriminately, and I wouldn’t be surprised to see, by the end of next year, the total spending cut to reach more than $200 billion (Dh734bn). What happens when you start cutting capex today? You are not going to see a reduction of flow anytime soon, but two years from now when you need production after the economic recovery, you are not going to have it.

Operating companies have no choice because they are running out of revenue. When prices drop by 60 per cent, the money that you would use to finance your capex projects is not there. Moreover because of the crisis, banks are being stretched and getting good terms on loans, if you can get a loan at all, will be more difficult.

We really are sailing in uncharted territory at the present with Covid-19.

The best direction for guidance, what we’ve always seen, is that the price of oil is much more sensitive to demand or supply than other commodities. If, for example, demand was higher than supply by 2 per cent, you’d probably see a 10 per cent increase in oil prices.

When you’re talking about cutting total production by 10 per cent, like Opec+ did on April 12, then that’s a 10 per cent cut in revenue, but it could yield more than a 10 per cent increase in the price of crude oil. Overall, it’s actually a win, and you can extend that further – if you cut 30 million barrels per day you could go back to the $50-plus level, gaining all of the 60 per cent loss in prices since January with a 30 per cent cut in production.

Any prediction of the future is probably going to be wrong at this stage. Predicting the coming days and weeks is almost impossible because it is more of a function of psychology and statements by politicians than fundamentals. Things  can move in any direction. China’s business is coming back but is currently nowhere close to the levels we saw before the pandemic, and its markets are still depressed from Covid-19.

A Sharjah National Oil Corporation gas exploration site. Oil prices are likely to remain significantly lower than $50 per barrel until the global economy recovers from the Covid-19 pandemic, SNOC's chief executive Hatem Al Mosa believes. Courtesy of Sharjah Government Media Bureau

In the longer term, over the next 6 to 18 months, it is going to be a function of how long Covid-19 is going to stay around. It may stay for a year, but in either case, the economic impact and the reduction in business worldwide will continue until we have a vaccine for the virus. Only at that time will you see a full recovery in demand.

I do not think the economic recovery will revert to normal levels until the end of next year at the earliest. Until that time comes, we will continue to see oil prices at significantly less than $50 a barrel, and shale oil will be crushed in this period down to unprecedented levels. When the recovery does eventually happen, conventional oil will be slow to react, and shale oil will come back with a vengeance. It will take over the lion’s share of the demand increases, and we will go into a hard-inflationary period when the recovery starts.

Hatem Al Mosa is chief executive of Sharjah National Oil Company