High

Oil & Gas

COVID-19 has reduced demand for oil products, whilst the push to achieve net zero carbon targets will prompt a structural shift in the sector.

Sector trends & challenges

  • Reduction in demand

    During the pandemic, daily demand for crude oil has decreased by c.10% from 2019 levels. Although global economies are starting to recover, forecast demand in 2021 is not expected to even return to 2017 levels.

  • Renewable Energy Policy

    Many national governments have recently announced plans to reduce emissions by radically scaling back use of fossil fuels. New policies include investment in clean hydrogen, CCS, nuclear energy R&D, and wind farms.

  • Cost cutting & liquidity

    With continued investment in the green energy transition, operators will need to continue identifying efficiencies to protect bottom line and bolster liquidity.

Sector rating profile

Market volatility is the long term 'norm' for the oil and gas sector and it has weathered many substantial downturns, most severely in 2015/16 in recent years. The industry has used to the pandemic as a catalyst to change as it moves forward on a longer structural transition to 'net zero'. It is clear that oil demand may not recover to pre-2020 levels for some time and this places familiar pressures on cost and liquidity.

Oil & Gas

COVID-19 has severely impacted activity across a wide range of sectors and the demand for petroleum has fallen materially since the end of 2019. Daily demand for crude oil, for example, decreased from 100.1 million barrels per day (mb/d) in 2019 to 91.3 mb/d in 2020. The forecast recovery of demand is not expected to even return to 2017 levels during 2021.

However, signs of recovery are emerging, and the price of oil has recovered to pre-COVID-19 levels, driven by the return of economic activity, particularly in China. Future demand will continue to be driven by growing economies.

Though the cause is different, the sector is showing marked similarities to the 2015 slowdown, when oil prices fell 53% below the previous year’s average. Though the impact on the sector in 2020 has been less severe, it continues to create a tough trading environment throughout the supply chain.

COVID-19 may hasten the ongoing decline in exploration activity, and oil field services are likely to experience ongoing operational challenges. Governments may have to intervene to support local refinery activity where aggregate demand remains low.

Over the longer term, national governments around the world have recently announced plans to reduce emissions by radically scaling back the use of fossil fuels. In December 2020, the UK Government published a paper titled ‘Energy white paper: Powering our net zero future’. The 170-page document sets out a plan to ensure the UK has net zero emissions by 2050, although a lot of the changes to reach this target will need to come much sooner. The paper highlights the use of clean hydrogen, carbon capture and storage (CCS) and nuclear energy R&D as the main tools to remove our dependency on petroleum. More specific plans include banning the sale of new petrol and diesel cars by 2030; funding of £3 billion to improve home energy efficiency; and support for a large number of new offshore wind farms.

Similarly, in the United States President Biden has been quick to put climate change at the forefront of his administration’s agenda. Executive orders have been signed which are designed to freeze new oil and gas leases on public land and double wind-produced energy by 2030.

The impact of these on balance sheets, cash flows and wider strategic focus are significant. Managing cash flow and working capital will be critical as the sector pivots towards a greener future.

Find Your Expert

James Fagan is Interpath Lead for the ENR sector, which includes Oil & Gas as one of four core segments. Matt Little leads our approach to Oil & Gas nationally, with support from Geoff Jacobs on the Oilfield Services sub-sector. For a full list of our senior people with experience in this area, use the button below.

Our senior team