Rystad Energy is one of the world’s leading experts in the Oil & Gas sector. As all parts of the industry take stock of the damage done by the Covid-19 pandemic, founder and CEO Jarand Rystad recently discussed his vision for the future of Oil&Gas in the short and medium term.
PartnerShip: What is the impact of Covid-19 on the Oil & Gas market?
￼Jarand Rystad : The whole world has put a stop to airline and car travel in a coordinated way, and as a result the market is experiencing its biggest contraction ever. April saw a contraction of 28 million barrels of oil, which is ten times more extreme than the most extreme situation we’ve seen before. Depending on the degree of lockdown from region to region, road traffic fell between 20% and 70% in April. Aviation was down even more sharply – in May there were 28,000 flights per day, against around 115,000 per day that had originally been projected. At the same time, a fall in global GDP brought down demand for oil used as energy and as a raw material in manufactured goods. With lockdown ending in most countries, road traffic should return to around 90% of pre-pandemic levels within as little as four months, but it will not rise higher for some time. Aviation will take much longer to return to something like normal. By the end of 2020, it will only be at about 35% of pre-crisis levels at best. There will be very little international air travel, but domestic air routes in China, India and the US will gradually drive the comeback.
PartnerShip: Can we expect to see further consolidations in the industry?
J.R. : The majors haven’t been so badly affected as they can mostly recover margins through downstream integration. It’s the independent players who are suffering from low volumes and low prices. Some of them are struggling to keep the creditors away. They could be forced into consolidations, but typically many smaller companies have portfolios that are not of interest to the majors – the fields are too small and not productive or profitable enough. They are more likely to be taken over by financial players, with debt holders becoming shareholders.
PartnerShip: Will this crisis accelerate the energy transition of oil companies?
J.R. : It will have a positive impact overall, but the first impact will be negative, on account of delays to ongoing projects and to public auctions for the land needed for acquiring land for renewable power plants. While oil is priced in dollars, power is usually priced in local currencies, so questions of profitability arise. For these reasons, renewable energy projects are being held up and delayed. But two years from now, cost improvements for renewables compared to fossil fuels will be much better, and the current situation will end up benefiting the green shift.
“Two years from now, cost improvements for renewables compared to fossil fuels will be much better, and the current situation will end up benefiting the green shift.”
RYSTAD ENERGY CEO
PartnerShip: Have Oil & Gas companies taken the digital revolution far enough?
J.R. : There has been continuous improvement in software, remote sensing, etc. In heavy industries, you expect the impact of digital to be evolutionary rather more than revolutionary. I’d say there has been a 2% improvement in productivity every year, which I’m sure will continue. The competition between offshore and shale is interesting: the learning curve for shale has a shorter cycle time, so there has been faster improvement.
PartnerShip: What do you think will be the main trends and strategies in the development of the Oil & Gas sector by 2025?
J.R. : I think when the price per dollar reaches about $50 to $55, the industry will start investing again. I think this will happen in about a year from now, well into 2021, and then I think that in 2022 the oil price will go significantly higher. By 2022 and 2023, I think there will be very hectic times for oil and gas companies, with good prices and lots of activity. However, but it’s possible that high prices will kill demand: if gasoline prices rise too sharply, people are more likely to choose electric vehicles. All the same, I think oil and gas companies will experience a good period, but then the boom will be followed by a bust – it’s usually four years from boom to boom, or from bust to bust. The majors will manage fine. They’re embracing the energy transition more and more – even the Americans are talking about it. The majors increasingly have the ambition to position themselves as energy companies, with the benefits of familiar brands and proximity to end-users. Smaller companies will benefit from just having a harvest strategy – limit costs, harvest what you have, do less exploration.