The coronavirus pandemic has challenged the cornerstone of the world’s economies. The oil and gas industry is one of the industries feeling the impact of this health crisis as seen with the significant drop in the price of oil.
The industry has recorded the lowest prices in 15 years due to a decline in demand and a global oversupply of oil. The demand for oil has gone down by 23 million barrels per day since March 2020, consequently creating an imbalance in the supply of the commodity. The oversupply of oil products on a global scale has led to a severe shortage of facilities used to store surplus oil.
According to Boris Ivanov, GPB Global Resources’ founder, the pipelines and tanks used to store surplus oil are reaching breaking capacity due to reduced demand. The stockpile caused by the demand and supply imbalance has the risk of overwhelming oil industry logistics as well as saturating storage capacity.
Using tankers as a form of storage has not been tested or proven to be effective. Mostly, the Saldana Bay oil storage terminal has been used as an outlet for excess crude oil whenever there is reduced demand, but that facility is close to full capacity. This shows how oil storage capacity is getting the heat from this global pandemic.
The OPEC countries have since agreed to cut the production of oil and gas as one way of dealing with the commodities’ oversupply. According to the International Energy Agency, the demand for fuel is expected to drop even if the tight lockdown restrictions are lifted. This carries the risk of wiping out the demand growth experienced over the last decade. The latest OPEC decision is by far the most significant oil supply cut in the history of oil production. Boris Ivanov has hailed this decision as a strong and necessary step in dealing with the pandemic’s effects on oil.
Implications of the crisis on the industry
According to Boris Ivanov, the coronavirus pandemic has created a supply and demand crisis for oil and gas worldwide as lockdown restrictions continue to mount. The issue has created a storage crisis and there is a worldwide oversupply crisis that has seen traditional oil stores nearing breaking capacity. This supply is predicted to continue outstripping demand as economic activities remain restricted across the world. There is more supply than demand for the commodity, which means oil prices will continue to experience downward pressure. The low demand can have a devastating impact on countries relying on crude oil for revenue.
For example, some oil-producing African countries have reported a reduction in the sale of crude oil, which means the storage tanks and pipes remain overwhelmed unless the supply is also cut.
However, there are expectations that the oil market will remain intact despite low demand due to its role in providing an affordable energy source. According to Boris Ivanov, despite employees in many sectors losing their employment due to the coronavirus, the workforce in the oil industry has strong and transferable skills that will allow them to shift into, among others, the renewable energy sector. With little training, oil and gas employees can adapt and meet the changing demands for working with renewable energy.
Preparing for the new oil world
As oil prices continue to crash, many participants in the oil and gas industry have been forced to change their operations and address the new reality. Boris Ivanov, founder of GPB Global Resources B.V., believes this is also an opportunity to embrace new technology in the oil sector and reduce the release of carbon.
The reduced demand for oil and gas should present an opportunity to implement green energy initiatives contributing to the reduction of carbon emission. Many people are looking at different ways of embracing the energy transition as they reduce their dependence on oil and gas. With plummeting oil prices, experts have reported this will be an opportunity for renewable energies to take over. The idea is that the demand for renewable energy will increase after the coronavirus pandemic due to the low demand for oil and increasing awareness of climate change. This means the COVID-19 pandemic may help society transition to a world of renewable energy in the foreseeable future. More people are embracing the idea of green and renewable energy and more efficient use of crude oil.
Technology has always been presented as the way forward for the future of the oil and gas industry. This pandemic is making that possible, requiring firms to invest in automation and facilitating remote working. Technology can be applied as a solution to make oil and gas platforms safer. To make another example, technology can be used to connect the supply chain from raw materials to customers. In most cases, technology application has been shown to improve efficiencies, reduce inventory costs, and increase customer experience through transparent services.
Oil and gas companies have to prepare for the new world after the coronavirus pandemic by investing in technology and green energy. They should be ready to modernize their processes and improve operational efficiencies if they wish to remain competitive and relevant. As a result, oil companies need to adapt their operations in line with changing consumer needs to create more opportunities.
At the same time, the current inventory overhang has been encouraging market participants to reflect on the challenges of storing oil and its effect on the industry. Some stores turn to tankers to hold and transport the oil as a temporary solution of the problem. However, the extreme demand shock in oil markets means this solution will not last. Other probable solutions have seen oil producers considering paying buyers in taking the commodity instead of shutting down operations.
There is hope of an economic recovery even as countries work to tackle the coronavirus. Different governments are lifting their travel restrictions, which is the first step in increasing demand for oil and helping with prices. However, it might take time before there is a turnaround in oil prices. Market analysts believe that oil prices might not reach the heights they reached at the beginning of the year despite a rebound in the economy. The motivation for economic recovery is that this is not the first market volatility to hit the oil industry. Over and over again, the industry has bounced back from severe market volatilities due to its importance in the energy sector. While this is different territory, it will take a recovery to turn the oil market around depending on how well countries manage the virus.