The one-two punch - responding to oil and gas disruption in Australia

Despite the fact Australia has fared better than other oil producing countries in terms of controlling the Covid-19 pandemic amongst its population, the local oil and gas sector will be unable to avoid the side effects. The virus has driven a demand-side shock which is rippling through the global economy. Global oil demand is expected to be lower in 2020, compared with last year – a level of decline not seen in more than a decade.
The one-two punch - responding to oil and gas disruption in Australia The one-two punch - responding to oil and gas disruption in Australia The one-two punch - responding to oil and gas disruption in Australia The one-two punch - responding to oil and gas disruption in Australia The one-two punch - responding to oil and gas disruption in Australia

Christophe Bourdeau is a Managing Director in Accenture Australia and New Zealand’s Resources practice.

 

The Australian oil and gas industry, both upstream and downstream, is already beginning to see the ripple effects of COVID-19. The sector has seen hundreds of job cuts; and planned spending on major transformation projects have been halted. 

Demand for domestic fuel continues to be hit hardest by local efforts to arrest the spread of the deadly pandemic, as state and international borders closed, airlines slashed flights, and passengers quickly cancelled travel plans. According to statistics published in April by Facts Global Energy, overall demand for gasoline had dropped by 50 per cent and the need for jet fuel had decreased by 70 per cent since the outbreak of the pandemic.

Both globally and in Australia, the oil and gas industry has been no stranger to fluctuations in supply and demand. Following the 2008 global financial crisis, the industry saw sustained growth, stable and high oil prices, but profitability was impacted by declining capital returns and costly project overruns. Then in 2014, oil prices crashed, resulting in the industry experiencing steep falls in oil prices, enforced layoffs and big capital budget cuts.  

The events of COVID-19 continue to evolve across the world, creating an unprecedented situation, with the full impacts both unpredictable and likely to last well into 2021. Increased pressures will not only be placed on commodity markets with producer nations, but also investors, oil and gas companies and alternative energy businesses taking the brunt of the impact. 

What's different this time around?

In the lead-up to COVID-19, the Australian oil and gas industry was already facing disruptions on multiple fronts. Digital technologies, the drive for greener energy and demand for more consumer-centric services were putting national mandates and shareholder returns at risk, while creating a major re-evaluation of future commodity prices and energy value chains. 

The simultaneous demand contraction caused by the pandemic and concurrent ramp-up in supply has not been seen before. 

Resources have become more abundant, the market more competitive and alternative energy sources more prevalent; paving the way for new sources to be leveraged for traditional oil and gas supply. 

The downstream sector has long served as a cushion for the industry and the 2014 crash in oil prices is a prime example of this. However, the impact of COVID-19 has changed the rules and the downstream sector will not be able to act as a saviour in this cycle. The potential for higher margins will be blunted by reduced volumes as a result of the economic contraction. 

 What will remain the same?

Until recently, the demand for both oil and gas was growing, with the Australian 2018-2019 cycle reporting over 29 billion litres of domestic refinery output, LNG exports of $50 billion and a 4% increase in diesel sales. 

A return to this growth is possible, once the global economy stabilises, as oil and gas is critical to sustaining development and to drive prosperity in the developing world, not to mention in meeting the needs of a global population expected to grow by two+ billion people. 

While the economics of oil and gas extraction are improving considerably, since the 2014 oil price crash - by up to $10-$20 per barrel - ultimately the full-cycle breakeven economics of the marginal barrel will set the equilibrium price. The breakeven price is still in the high $50s to low $60s per barrel. Markets can stay irrational temporarily, but ultimately fundamentals will prevail. 

Challenging times require an intelligent response

History has shown that oil and gas companies are often ill-equipped to deal with major demand or impacts to supply and the popular approach of riding out the cycle is no longer an option. 

Moving forward, all oil and gas companies need to take actions which aim to focus on steadying cash flow, reducing costs and securing revenues - ultimately fortifying the organisation for any eventuality. 

There are five critical steps oil and gas companies can take to build organisational resilience: 

  1. Set up a 24/7 virtual command centre to keep a pulse on the market and dynamically stress test the business

  2. Fast track competitiveness— Zero-base everything rapidly

  3. Improve liquidity by rethinking and rebalancing capital spend and portfolio

  4. Unlock operational and commercial resilience

  5. Plan and prepare for the worst-case scenario

Rethink to emerge stronger 

Many disruption trends were already in motion in Australia before the COVID-19 pandemic hit, requiring today's oil and gas companies to respond by pivoting from traditional measure and taking new pathways to fundamentally rethink and reduce their structural costs in non-traditional ways. 

This can be achieved by: 

  1. Creating cost variability and eradicating complexity while freeing up capital

  2. Joining hands with peers and competitors 

  3. Bringing the ecosystem creatively into play

Challenging times across the Australian oil and gas industry call for smart measures that cover both traditional and non-traditional measures. 

While the industry has overcome many challenges in the past, this time it is faced with concurrent disruption at an existential, system-wide and player level. These risks will truly test its tenacity and durability. The organisations in Australia which are more likely to survive post Covid-19 will certainly be leaner and stronger.

 

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