Oil prices have plunged during the pandemic and the sector’s crisis could get worse as new investments are unlikely to flow in, experts said at an energy conference this week, CNBC informed.
Pandemic-related movement restrictions stopped people from commuting and traveling, drastically reducing oil usage. Earlier this year, the May contract for U.S. benchmark West Texas Intermediate crude plunged deep into negative territory for the first time in its history. Overall, oil prices have dropped around 40% since the start of the year.
With the poor performance across the industry, analysts at the S&P Global Platts’ Platts Asia Pacific Petroleum Virtual Conference (APPEC) 2020 this week flagged that drawing investment to the sector would be a problem.
Ben Luckock, co-head of oil trading at commodity trading company Trafigura, said that it might be “hard to see where the investment comes from.”
Speaking at the APPEC conference, he pointed out that, as a result of the fall in oil prices and corporate valuations, capital expenditure in exploration and production (E&P) companies in the energy sector have plummeted. Such companies are involved in the early stages of energy production, which includes searching and extracting oil and gas.
“Who is going to fund our next investment cycle? Indeed, is anyone going to be incentivized to fund us? Returns on the E&P companies as an investment have been poor,” Luckock said. While returns on the S&P 500 have boasted a 70% increase since 2015, he pointed out returns of E&P companies fell by 70% over the same period.
Ahmed Ali Attiga, the chief executive officer of the Arab Petroleum Investments Corporation (Apicorp), said that the energy sector is set to see a “huge hit” on investments.
“From a funding perspective, the energy sector in general faces two key problems. One is the relatively low shareholder return, and the second is the squeezed margins across the value chain,” he said at the conference. “This phenomena in the energy sector … poses key challenges for where financing is going to come from, and particularly so in a period of acute crisis.”
In a report earlier this year, research firm Rystad Energy projected that E&P companies could lose as much as $1 trillion in revenues this year — a 40% decline year on year. Last year, the industry made $2.47 trillion in revenues.
“It doesn’t bear comparison, people don’t want to put their money into the E&Ps with good reason. That still leaves the world with a major problem,” Luckock said.
“Regardless of when peak demand happens, which is now harder to forecast than ever, we’ll still need tens of millions of barrels of oil a day for years to come. And we need to see investment happen in order to find, develop and produce those barrels,” he concluded.
The International Energy Agency on Tuesday cut its forecast for 2020 oil demand growth, trimming its outlook for worldwide oil demand growth to 91.7 million barrels per day (bpd). That marks a contraction of 8.4 million bpd year on year — more than the previous forecast for a 8.1 million contraction.
But Attiga told CNBC on Wednesday that investors should view times of crises as also investment opportunities.
“Crises like this in the energy sector, in particular, provide opportunities to invest. Distressed assets affect valuations and presents opportunities for new investments, and providing what we call patient capital — capital that can go in and stay there until the role is satisfied,” he said.
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