Page 6 - Euroil Week 10 2020

EurOil COMMENTARY EurOil
European oil industry shaken by price crash
If low prices persist, some North Sea projects will be shelved and some small- sized players will struggle to stay afloat. Refiners can enjoy strong margins for the time being, but the coronavirus will eat into fuel demand
EUROPE
WHAT:
North Sea operations are more robust now than they were before the 2014 crash, but $30-35 oil puts this resilience to the test.
WHY:
Russia and Saudi Arabia have launched another supply war.
WHAT NEXT:
Some projects could
be shelved, and some small-sized players could struggle to stay afloat.
OIL is now trading at $30-35 per barrel, as Rus- sia and Saudi Arabia prepare for what could be a long and damaging supply war. While the new price reality, should it persist, is great news for European consumers, it also draws into stark focus the cost disadvantage of Western European producers.
Producers off the coast of the UK and Nor- way are better prepared for prolonged low oil than they were prior to the steep decline in oil prices in late 2014. They have been contending with low prices for years now. Some projects and players did not make it, but those that have sur- vived are leaner and more prepared for sudden market changes.
Even so, many North Sea producers struggle with prices much below $45 per barrel. Current conditions, if they are here to stay, could lead to some fields closing. A number of future projects are also at risk of being delayed or abandoned. In the UK, project sanctions are already at a low, totalling just six last year compared with a dozen in 2018. This year could see a further decline if low prices persist.
Many small-sized players, with a limited cash cushion, less access to financing and weaker economies of scale, will be hardest hit. But some larger companies such as London-listed Pre- mier Oil and Tullow Oil are also in trouble. The pair are each saddled with around $2bn of debt, having borrowed heavily to fund acquisitions. Premier saw its shares more than halve in value when markets opened on March 9, in response to Saudi Arabia’s announcement it would seek to flood the market to bring Russia back to the negotiating table. Tullow, meanwhile, closed 30% lower on the day.
Shares in Norwegian giant Equinor slid 18% on March 9, while Norway-focused Aker BP’s stock slumped 24%. Norway’s currency, the krone, also weakened to an all-time low against the euro in early trading, dropping 5.3%. Around a fifth of the country’s annual GDP derives from oil and gas.
Equinor will be thankful it can rely on an increasing source of low-cost production from the giant Johan Sverdrup oilfield, launched in early October and set to be producing 440,000 barrels per day (bpd) of oil by this summer. The company estimates that Sverdrup enjoys
a break-even price of just $20 per barrel, with operating costs of under $2 per barrel.
European majors were not unscathed, with BP and Royal Dutch Shell both closing at 19% lower. In the current price environment, inter- national oil companies (IOCs) could struggle to make good on their previous promises of attrac- tive dividends.
The bright spot for Europe’s oil industry, at least in the immediate term, is its refining sector, which saw margins strengthen on the back of the oil price slump.
The continent’s refineries struggled for years with overcapacity before the 2014 oil price crash, which at the time seemed like a temporary reprieve. Low oil prices persisted, however, helping to bring a trend of refinery closures in Europe to a halt. While European refiners may draw some temporary benefits from this week’s price collapse, it may not be enough to mitigate the impact of the coronavi- rus on fuel demand, as well as extra fuel supply coming on stream.
“Refiners will get temporary relief from the cheap crude, but any sustained increase in runs will see a worsening oversupply situation in the products markets beyond 2Q after peak turna- round season,” Energy Aspects analyst Sandra Octavia told Bloomberg on March 11.
Authorities across the world are seeking to contain or slow the spread of coronavirus, result- ing in reduced air and road travel. Refiners’ costs will fall, but so will their sales.™
P6
w w w . N E W S B A S E . c o m Week 10 12•March•2020