By Reham Gamal, Fatma Ahmed
In 2020, the world economy sufferedfrom the COVID-19 pandemic, which caused cracks in most of the industries, one of which is the oil and gas industry. The economy witnessed lockdowns associated with lower performance and production rates. However, by the start of 2021, the economy commenced its recovery trip thanks to the emergence of the vaccine and the early governments support packages, which were the main drivers for such a recovery. The International Monetary Fund (IMF) estimated that the global economy has grown by 5.9% in 2021, which is the highest in the past ten years, after the sharp decline of the global gross domestic product (GDP) in 2020 recording -3.1%.
A Glimpse into the Oil and Gas Market in 2021
Due to the lockdowns and low demand for oil, 2020 has witnessed a high fall in prices especially West Tax Intermediate (WTI). In April 2020, the WTI crude oil price recorded negative levels for the first time in history. This also led to a cut in production and postponed many investments which led to a decline in the global supply in the near and medium-term.
“In 2021, with the introduction of COVID-19 vaccines, and the removal of lockdowns and travel restrictions saw an increase in oil and gas demand and an upturn of the oil and gas market throughout the year,” Najeeb Ayinde, Oil and Gas Economist, said.
By the start of Q3 2020,oil and gas activitiesbounced back with the oil production exceeding five consecutive quarters due to an increase in the global oil consumption rates. This resulted in petroleum stock withdrawals that averagedat 1.7 million barrels per day (mmbl/d) over this period. These withdrawals drove the oil pricesup again from Q3 2020 to Q3 2021, according to the US Energy Information Administration (EIA). However, the oil prices decreased slightly during Q3 of 2021 after the emergence ofthe Omicron variant.
A Deep Look Into Performance
Regarding the global industry performance, most oil and gas activities experienced an improvement, which is represented in the global rig count. According to data released by Baker Hughes statistics, the rig count declined by 53% during Q3 2020 reaching 3,099 rigs compared to 6,585 rigs in Q3 2019. Yet, the rig count rose by about 37% to record 4,262 rigs in Q3 2021,which was driven by the policies and strategies to flourish the sector globally.
Regarding the financial performance, international oil and gas companies (IOCs) went to take several decisions during 2020, after precepting the global recession and drop in oil demand. These decisions included, but were not limited to, suspending share buybacks, reducing capital spending by a quarter on average, cutting operating costs, in addition to securing access to liquidity through new credit lines and bond placements, according to Scope Ratings.
In 2021, IOCs started to follow more disciplined strategies with production and capital guidance. Scope Ratings revealed that, in 2021, the drilled but uncompleted shale wells have decreased by 37% during the period between January 2020 and September 2021; the production level is steady and expected to increase by 2-3% and the global upstream capex is predicted to jump by 4%.
In this regard, the economist advised the companies to “be more disciplined with their capital and reduce the cost of operation, restructure and enhance their portfolios, digitizing their operations” for the next year.
Although the crises of the pandemic affected the global oil and gas sector, the Egyptian situation shows more robustness. The Egyptian oil and gas sector managed to transform the crisis into a chance due to the reforms adopted by the Egyptian government since 2014.
The oil sector contributed 24% of the Egyptian GDP for the fiscal year (FY) 2019/20. It was able to attract new research and exploration investments for the first time. Also, the industry achieved the highest production rate in the history of Egypt during the FY 2019/20, with a total production of 1.9 million barrels of oil equivalent per day (mmboe/d).
The decline in oil prices, due to the appearance of Omicron, has positive effects on Egypt as it would decreasethe cost of oil subsidies, which will help reduce the budget deficit.
For 2022, there is an expectation that the demand will increase even at a slow pace despite Omicron’s appearance. Based on this projection, OPEC+ decided to adjust upward the production by 0.4 mmbl/d in January 2022. Ayinde expected that the oil and gas sector’s recovery would still be in good shape in 2022 because of the increased rollout of booster shots of vaccines in several countries.
The Energy International Agency (EIA) predicted that this scenario could cause a limited upward price pressure in the coming months, adding Brent prices will remain near current levels at an average of $70 per barrel. It is also projected that the global oil stock will increase at an average of 0.5 mmbl/d by the start of Q2 2022 through Q4 2022 as production begins to increase faster than global demand.
Additionally, natural gas prices have increased at the end of the year. According to Fitch Ratings Expectations, it is likely to remain high in Q1 2022, particularly in Europe and Asia, driven by high demand in Asia, as well as a fairly low amount of gas in European storage facilities. However, its prices are projected to be moderate between March and April as the average prices for the year will remain high before returning to normal in 2023. As for the refining industry, refinery production is expected to grow 3.7 mmbl/d in 2022.
All the mentioned actions pave the way to a more stable year for the global oil and gas market either for the upstream activities or the implemented investments in addition to achieving a balanced supply and demand.