OPINION: COVID-19 – Preparing for the new normal in Oil & Gas

OPINION: COVID-19 – Preparing for the new normal in Oil & Gas

Forward-looking companies will use this time not only to mitigate challenges and become more efficient, but also pursue disruptive opportunities and pioneer new business models.

New Delhi: As the oil executives of India’s major oil companies met in mid-March, they were looking back at yet another year of growth in the demand for oil. Looking ahead, they likely had some apprehensions about pace of economic growth. However, the possibility of seeing the first contraction of oil demand in nearly half a century may not have crossed their minds.The next couple of weeks brought an unprecedented situation. The demand for transport and industrial fuel didn’t just soften; it contracted sharply in most parts of the world. Refineries and supply chains were forced to slow down. Meanwhile, India’s domestic liquefied petroleum gas (LPG) consumption shot up as the country went under lockdown and nearly everyone stayed home—forcing more imports of an already import-dependent product. Suddenly, a supposedly China-focused first-quarter problem had landed in India’s own backyard.

The global context

Meanwhile, in just a few weeks, the global implications of the pandemic became clear. Demand crashed—down by an estimated 30 percent in April—and OPEC supply management, which in previous crises was enough to stabilize oil prices, barely made an impact. Global oil prices are at astonishing lows. Capex spending is being slashed in a sign that global oil companies expect soft prices to continue. In the short term, companies’ focus will need to shift to cash management and
meeting debt obligations. However, in the long term, forward-thinking boards will ask themselves where capital can best be deployed: in the oil value chain (and if so, at what crude reference price) or outside. The debate about when peak oil consumption will be reached has intensified, though no guarantees that we haven’t reached it already.

A reset year for India

After enjoying decades of growth in the demand for oil, India now finds itself in uncharted territory with the pandemic-induced lockdown.. In the third week of April, industrial and transportation fuel demand were 50 to 70 percent below normal—forcing refineries and supply chains to back down. Demand for non-essential oil products such as lubes and bitumen has been decimated during this period.Even in this highly uncertain environment, operations still need to run and crucial decisions still need to be made. So which market parameters should oil companies focus on over the next few weeks and months?

To gain a clearer picture, we explored how COVID-19 could impact India’s oil demand over the next few quarters and the next two to three years deploying scenario planning techniques modelling different recovery scenarios across on various end-use segments.We project that India’s demand for transportation fuel could see an unprecedented degrowth in the next year—and some of that demand could be gone for good. Diesel, India’s largest consumed liquid fuel, could see a degrowth of 8 to 13 percent in FY2021, with construction and heavy industries dragging demand down as they struggle with their own recovery. Petrol demand, which depends largely on personal vehicles, is likely to bounce back faster, though it still could see 5 to 12 percent degrowth depending on the length and intensity of lockdowns. We expect some permanent demand destruction here as new ways of working emerge, including telecommuting. Aviation turbine fuel is likely to be the hardest hit with over 25 percent demand destruction in some scenarios, as people may avoid business travel and choose to defer vacations until after the crisis is long gone. LPG is the only product that is expected to remain relatively unscathed thanks to strong domestic consumption. However, this won’t bring much joy to the sector as it increases companies’ import bills.

Looking ahead

Four factors will determine whether oil demand returns to pre-COVID-19 levels in FY2022 or if it will take longer:

Economic stimulus: The extent and effectiveness of government initiatives to stimulate the economy—not just in India but around the world—will have a strong impact on GDP and any potential resurgence in oil demand. Stimulus programs for the airline, automotive, construction, and infrastructure sectors will have the biggest impact on both GDP growth and oil demand.Consumer behavior: Pandemic-induced shifts in consumers’ behaviors could have a permanent impact. More people working from home, less non-essential travel, and fewer large gatherings could suppress the demand for oil, but a move from public to private transportation could enhance it.Supply chain realignment: The extent to which global supply chains realign to create alternatives to China and how much India is a part of those realignments could drive growth two to three years down the road, but not immediately.Supply interventions: Although less effective than before, supply interventions could play a role in lower crude prices, which triggers higher demand.Four imperatives for the Oil & Gas Sector

As India’s oil & gas sector strives to manage the uncertainties over short term, it needs to keep in perspective the longer term opportunities Four imperatives can help Indian oil & gas sector emerge stronger after the crisis subsides:Ensure short term business continuity
– Adopt best in class measures to safeguard teams
– Stay connected with your ecosystem of suppliers, dealers and other stakeholders.
– Mitigate risk related to manpower availability after the lockdowns are over.

Restructure costs and reset to a new normal
– Take immediate steps to conserve cash and optimize working capital.
– Develop programs to fundamentally alter the cost structure
– Adopt new technologies including digital ways of working

Re-imagine the operating model
Companies have had to re-configure their operating models during the lock-down phase. These learnings can have a transformative impact if these are sustained, especially
– People – integrate productivity gains, manning norms changes
– Processes – sustain the benefits gained from adoption of digital tools, rapid decision making, faster turnaround times witnessed as response to COVID
– Governance – adopt localized governance to ensure resilience in operations

Prepare for the future
We expect the Indian oil demand growth story to continue post the COVID situation. Companies need to position themselves for the growth when it comes back:
– Develop portfolio strategies for the future
– Explore partnership and M&A opportunities.
– Use the opportunity to prepare for Energy Transition

As senior oil executives look back next March, they would realise that the current crisis forced them to take decisions which they might have shied away in the normal course. Forward-looking companies will use this time not only to mitigate challenges and become more efficient, but also pursue disruptive opportunities and pioneer new business models.

[Authors: Vikas Kaushal, Partner; Arun Unni, Partner; and Vivek Dua, Principal at Kearney]

[Disclaimer: The views expressed are solely of the authors and ETEnergyworld.com does not necessarily subscribe to them. ETEnergyworld.com shall not be responsible for any damage caused to any person/organisation directly or indirectly]

https://energy.economictimes.indiatimes.com/news/oil-and-gas/opinion-covid-19-preparing-for-the-new-normal-in-oil-gas/75665169

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