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Mckinsey & Co.: Service companies in oil & gas industry need new ways to create value

Oil&Gas Materials 24 August 2020 10:14
Mckinsey & Co.: Service companies in oil & gas industry need new ways to create value

BAKU, Azerbaijan, Aug.24

By Leman Zeynalova – Trend:

The oil and gas industry is at an inflection point: to sustain their businesses, operators and service companies alike will need to simplify their portfolios and establish new ways to create value, Trend reports citing Mckinsey & Co.

The company said in its report that at $25/barrel, conservatively, 2.5 million barrels a day (mbd)—some estimates are much higher—of global production would become uneconomic. “With this in mind, many operators have cut spending and postponed work. These are on top of actions taken in the previous decade, which reduced unit-cost production by 30 percent.”

Such measures preserve cash in the short term but risk leaving significant resources stranded from 2025 through 2030, according to the company.

“With the possibilities of external cost-cutting—for example, on contracting and leases—all but exhausted, oil and gas companies now need to look internally. That means reinventing their operating models to improve efficiency, extend asset economic life, create resilience, and reduce greenhouse-gas (GHG) emissions. Oil and gas companies cannot assume that oil prices will bounce back; rather, they have to make decisions that will allow them to operate even if prices hover near $25/barrel,” reads the report.

Mckinsey & Co. said that the outlook for the upstream sector depends greatly on two factors: how much the COVID-19 crisis will affect demand and how OPEC+ will respond.

To evaluate this, the company created three scenarios:

Scenario 1 is “OPEC+ control restored.” This assumes that the virus is contained; however, given the fall in demand thus far, the projection is that there will still be an 8.3 mbd demand reduction in 2020 compared to 2019. It also assumes that OPEC+ agrees to production cuts in 2020 and that output is balanced in the market from 2021 on. On that basis, the price recovers to about $50 a barrel.

Scenario 2 is “longer oversupply.” This scenario uses the same demand-reduction estimate—8.3 mbd—but assumes widespread noncompliance with OPEC+ production quotas in 2020 so that first-quarter 2020 production is maintained. A balanced market is delayed until 2023.

Scenario 3 is “delayed demand recovery.” This assumes a longer, less robust recovery leading to demand reduction of 14.8 mbd in 2020, compared to 2019. It also assumes that OPEC+ agrees to and implements production cuts. The market doesn’t balance until 2024, and prices stabilize at $50/barrel.

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Follow the author on Twitter: @Lyaman_Zeyn

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