COULD DIGITAL TECHNOLOGY SMOOTH OUT THE BUMPY ROAD AHEAD? ITP MEDIA GROUP / BUSINESS JULY/AUGUST 2020 • VOL. 16, ISSUE 07www.arielcorp.com/KBE Introducing the next development in Ariel’s KB product line; The KBE compressor frame. Enhanced by rugged KBK:T design features, the KBE is capable of fulfilling your upstream and midstream compression needs. Get more performance from the world standard in compression. Contact your Ariel distributor today for more details.JULY/AUGUST 2020 / Volume 16 Issue 07 22 Sustainability feature A GlobalData report finds that oil and gas companies are moving towards more sustainable practices as the industry faces scrutiny in the wake of mounting envi- ronmental concerns. 34 One minute with... In a quick-fire interview, Ole Hansen, head of com- modity strategy at Saxo Bank, comments on the current state of the oil and gas sector, and its short- term outlook. 12 On the cover: A digital cure? A series of industry experts comment on the role that digital technology can play in making oil and gas companies more resilient during and after the coronavirus pandemic. 08 APICORP: MENA energy outlook Dr. Leila Benali, chief economist at APICORP, explains its outlook for the next five years, and how the coronavirus pandemic will impact energy investments. Highlights in this issue: 12 COVER STORY 3 IN THIS ISSUE oilandgasmiddleeast.com JULY/AUGUST 20204 IN THIS ISSUE oilandgasmiddleeast.com JULY/AUGUST 2020 , “CIRCULAR ECONOMY IS LAGGING BECAUSE IT IS DARING.... IT DEPENDS ON OTHERS, AND NO ONE WANTSTODEPENDONOTHERS” CLOSING THE LOOP Editor’s choice: • Video: Who wins in Saudi Ara mco’s SABIC deal? • Oil & Gas Middle East Top 30 EPC Contractors • Video playlist: O&GME and Honey well SPS host roundtable • Video: O&GME and R&PME Awards achievers DOWNLOAD IT TODAY ON YOUR iOS, ANDROID OR KINDLE Also inside: App 24 34 05 / Editor’s letter Carla Sertin with her thoughts on surviving the triple threat against oil and gas 08 / Face to face Dr. Leila Benali, chief economist at APICORP, comments on the MENA energy investment outlook 34 / One minute with... Ole Hansen, head of commodity strategy at Saxo Bank, comments on the industry’s outlook 22 / Sustainability GlobalData reveals that oil and gas comanies are moving towards sustainability practices 06 / In numbers Rystad Energy says OPEC+ production cuts point to a supply deficit in 2021 www.oilandgasmiddleeast.com 08 06 12 05 KEEP UP-TO-DATE For all the latest news, check out www. oilandgasmiddleeast .com 24 / Project focus Everything you neeed to know about KOC’s Kuwait Bay exploration project 12 / On the cover A host of experts discuss the role of digital technology in helping oil and gas companies 22 Online5 oilandgasmiddleeast.com JULY/AUGUST 2020 EDITOR’S LETTER This month, Oil & Gas Middle East is focusing on the digital revolution, and how it could impact oil and gas companies continue operations throughout the coronavirus pandemic, through to the recovery phase. It is the hot topic of the moment, perhaps because it elicits hope, but also likely because early adopters reaping the rewards of their investments. In my last editor’s letter, I addressed this opportunity at some length, and because it is so important, our issue this month focuses on the digital revolution. A host of industry experts and analysts have contributed their knowledge to this issue, creating a multi-faceted view of the role that digi- tal technology can have in the era of coronavirus and in its aftermath (p12). We also spoke with Saxo Bank’s head of commodity strategy, Ole Hansen, and APICORP’s chief economist, Dr. Leila Benali, to learn more about the true impact of coronavirus on the oil and gas industry, as well as the out- look for the market in the coming months. Most analysts seem to agree that we are not in the clear yet; the oil and gas industry will have to buckle up for a bumpy ride, but there are ways to make it smoother until the market evens out and we eventually move closer to normalcy. Carla Sertin Editor Oil & Gas Middle East A digital remedy? SUBSCRIBETo subscribe to Oil & Gas Middle East, or other ITP Business titles, go to: www.itp.com/subscriptions. 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THIS ISSUE: Experts explore the potential for digital technology in boosting oil and gas through the pandemic (p12)The forced oil production shut- downs and the extension of the generous OPEC+ voluntary cuts into July will not only balance the Covid-19-hit global crude and con- densate demand, but are deep enough to create a monthly deficit starting from June 2020 and continuing uninter- rupted until at least the end of next year, a Rystad Energy analysis shows. The oversupply, which sent WTI oil prices into the negative earlier this year, is a thing of the past as long as OPEC+ compliance stays strong and the oil demand recovery trajectory isn’t radi- cally altered. The last surplus month appears to have been May, when crude and condensate production exceeded demand by about 6.1 million barrels per day (bpd). June is now already set for a global production deficit of about 1.5 million bpd. The imbalance is forecast to reach 4.6 million bpd in July, 4.2 million bpd in August and, after being reduced a little during the remainder of 2020, GLUT NO MORE Fresh OPEC+ cuts point supply deficits through 2021 6 IN NUMBERS oilandgasmiddleeast.com JULY/AUGUST 2020peak at 5.2 million bpd in January 2021. Although the shortfall will ease after that, Rystad Energy estimates that monthly deficits will remain throughout next year. “We believe OPEC+ is attempting to create a mini-bull-cycle by quickly tightening the prompt market, helping depressed prices and creating a supply environment that will facilitate a rapid relief of oil storages, as deficits will trigger large stock draws,“ says Rystad Energy’s Head of Oil Markets Bjørnar Tonhaugen. Rystad Energy estimates that global crude and condensate production will stay below 80 million bpd for all the remaining months of 2020. Output will likely reach 71.4 million bpd in June and grow monthly to a high of 78.4 million bpd in December. Demand, on the other hand, is set to reach 72.9 million bpd already in June 2020 and exceed 80 million bpd from September onwards, reaching an annual monthly high of 82.3 million bpd in December. “However, if the oil price continues its steady ascension, this will spur reactivation of parts of the curtailed US oil production. Also, if frac crews end their holidays early, US volumes may be coming back more quickly than OPEC+ expects, bridging part of the deficit,“ adds Tonhaugen. Still, there is not consensus among an- alysts and economists about the extent of the damage done to the industry, and the path to recovery. Source: Rystad Energy Cost Service Analytics 7 IN NUMBERS oilandgasmiddleeast.com JULY/AUGUST 20208 FACE TO FACE oilandgasmiddleeast.com JULY/AUGUST 2020 Can you briefly give me the overview from the MENA Energy Investment Out- look. What were the major findings? From the MENA Energy Investment Out- look perspective, we’ve seen more or less the same trends here that we see globally. I mean, we are facing an unprecedented crisis. It is normal that we see cuts in investments. What is different this time is the cuts, compared to previous down- turns, started much earlier. They have started as early as 2020. In previous downturns, you would likely see the cuts in CapEx starting the following year. We have seen companies start with cuts in investments globally, but there are some different trends between the MENA region and the rest of the world. No vertical in the energy industry was left apart and it is quite unprecedent- ed. I mean, you see 20%, 30%, or even 40% reductions in CapEx among IOCs, NOCs, industrials and utilities. One of the key highlights, I think, that we have seen in the MENA region compared to other regions is that we have seen a positive story as far as gas is con- cerned. The gas sector is the only sector where we saw an increase of $28 billion of potential investments over the next five years. The other positive news in the MENA region is among the committed and planned investments that we have seen, and these investments are driven by AA-rated countries and strong countries, for example you have Saudi Arabia’s gas programme which is still continuing, recovery. And there are multiple reasons for that. From our perspective, given that we are looking into the MENA region as a commodity-dependent region directly or indirectly. We are looking into how com- modity prices, not only oil and gas, but all commodities are going to recover over the next couple of years. When you have a hole of -8 million barrels a day, or -9 million barrels a day, that is a quite deep hole. People are talk- ing about a narrow band of $30 to $40 per barrel of Brent crude. I prefer to talk about an average because I think there will be a lot of volatility in the future. The fact that we are seeing 20% to 30% capital cost cuts this year quite radically means that we will face huge volatility in the future, because these are supplies that will not be coming on time when demand will recover. There will be volatility in the next couple of years. It will take a bit more time to recover to a more structured, more balanced market. And I think that the suppliers are doing a good job in try- ing to find balance in the market. But I am concerned at this stage that we might see a couple of lows outside of that expected price band and also a few highs outside of that band. In the report, you mentioned that capital cost cutting could lead to a wave of mergers and acquisitions. How will that impact the industry? Because of the higher volatility that we will see in the future and because oil and gas companies will be under pressure to deliver a higher value proposition to shareholders, to preserve their dividends programmes, we are seeing a potential restructuring in the energy sector as a whole. That is something we were actu- ally noticing before this crisis. We wrote The next five years Dr. Leila Benali, chief economist at APICORP, on the region’s energy investment outlook, and why gas will see strong investments in the next five years. INTERVIEW “...IN THE MENA REGION, WE ARE LOOKING AT A POTENTIAL W-SHAPED RECOVERY COMPARED TO OTHER REGIONS WHERE YOU MIGHT SEE MORE OF A QUICK V-SHAPED RECOVERY.” Saudi Arabia’s power programme is still continuing. That is roughly $40 billion each. The UAE oil capacity programme is ongoing. That is more than $45 billion that we are assuming over the next five years. In Egypt, we have seen continuation of the petrochemicals monetisation drive, and the power modernisation program, and that is also more than $30 billion to $35 billion over the next five years that will be channeled in those two sectors. The three major countries where you will see the highest planned and com- mitted investments are Saudi Arabia, the UAE and Egypt, and we are seeing more than $60 billion that should be injected in the energy sectors, respectively, over the next five years. There are some some good stories to tell when it comes to energy investments in the MENA region, despite the cuts given the unprecedented crisis that we have faced in 2020. When do you expect the industry to start to see a recovery in oil prices and in oil and gas investments? There are two recoveries that we have to watch. The first recovery is related to when economies, particularly in con- sumer markets, like Asia, the U.S., and parts of Europe, will open up again and resume not only normal life, but also travel and and trade among themselves. We, especially in the MENA region, we are looking at a potential W-shaped re- covery compared to other regions where you might see more of a quick V-shaped 9 FACE TO FACE oilandgasmiddleeast.com JULY/AUGUST 2020 a paper last year on the renewed relation- ship between institutional investors and private equity. We have seen a rapproche- ment between sovereign wealth funds and national oil companies. And part of it is also driven to provide those produc- ers which are in the best fiscal position globally, and in the best leverage position, to be able to go through this type of crisis. So what we are seeing today is a potential restructuring that was already, I would say, happening. The other part that I think is interest- ing is that this crisis is really confirming the need to become increasingly inte- grated in your value chain. You see oil and gas producers trying to add additional downstream into their business model to increase integration. You have those additional efficiency gains of 10% to 30% that can be captured. After a couple of downturns already, af- ter the 2008 crisis and the 2014 downturn, the oil and gas sector is reaching 2020 already heavily efficient. So, for example, oilfield services companies have already been squeezed. Their margins have al- ready been squeezed so you have already seen a few companies filing for Chapter 11 that are natural targets for acquisition, especially when their fundamentals are strong. Beyond that, in the oil and gas industry, there could be actually the emergence of a totally new type of player, larger players supported by strong institutional inves- tors, including the sovereign wealth funds, which are largely integrated, integrated with downstream and petrochemicals, potentially with some assets in utilities and electricity. And of course, the last interesting trend is the drive to digitalisation. These opera- tors are coming already with squeezed margins, already efficient. I think that amount of efficiency that was driven between 2016 and today in the oil and gas value chain across the board is around 20% to 30% already. But the fact that you might have a bit more digitalization in oil and gas operations might create new types of players that are, in addition to being integrated, even more digitalised. So it is a sign of exciting changes that are happening. What about the energy transition? I think this is one major lesson that this crisis has taught us. We have learned that you can lock down 40% of the world’s population for weeks and you can have 1.5 billion students home-schooled and you will still not be able to reach the Paris targets. That has increased the level of awareness among climate change circles in the energy sector and the non-energy side as well, that the issue of emissions and climate change has to be taken much more seriously than it has been in the past if we are to reach the Paris climate goals. This is particularly true if we see a W- shaped recovery or a V-shaped recovery where economies are going back full steam to recover part of the GDP that has been lost in 2020 and 2021. It is increas- ingly evident that you will need to use all low-carbon technologies, of course, renewables, and gas, as a fuel, which is definitely the most versatile and can be used in all applications and transporta- tion, industries, activities. Whether we like it or not, gas will continue to be used over the next couple of decades, at least, in all those applications. Whatever we think about hydrocar- bons, I think it is quite important for us that the fundamentals of gas, natural gas in general, remain strong, so gas is playing the role that is supposed to be playing and is economically sound to continue to play that role in the future. “...THERE COULD BE ACTUALLY THE EMERGENCE OF A TOTALLY NEW TYPE OF PLAYER, LARGER PLAYERS SUPPORTED BY STRONG INSTITUTIONAL INVESTORS, INCLUDING THE SOVEREIGN WEALTH FUNDS, WHICH ARE LARGELY INTEGRATED...”Next >