Look ahead to 2020: Another challenging year lies ahead for Oil and Gas sector

By Dr Marc Gronwald, Senior Lecturer in Energy Economics, University of Aberdeen

It is very likely that 2020 is going to be at least as challenging as 2019, if not more so, for the oil and gas industry.

There are two main reasons for this. Firstly, the oil price is expected to remain on a relatively low level, overall comparable to last year. Second, the energy transition has only just begun and any prediction as to how this may play out for the supply chain is very difficult. However, in order to not sound too gloomy, it should also be noted that 2019 ended with some optimistic news – some signs of an improved global economic climate, the insight that the OPEC+ cuts seem to be effective and improvements in the China-US situation.

The main reason why the oil price is unlikely to increase substantially is simply because the market is still very well supplied, if not oversupplied. In particular non-OPEC production is expected to be very strong; not only in the United States but also in countries such as Norway, Canada and Guyana. As for US production, a further increase is predicted; however not as large as in the recent past. This certainly implies that the OPEC meeting in March will be followed very closely. In addition, the election in the US will determine in which direction US production will develop in the medium term. As for oil demand, even though there is some hope that the global economy will recover, it would be dangerous to expect anything too exciting.

Two recent incidents vividly illustrate the current state of the crude oil market: the drone attack on Saudi Arabia’s oil facilities in September 2019 and the killing of Iranian General Soleimani in early January 2020. In both cases, the oil price initially showed the expected reaction, which was a sharp increase. However, immediately afterwards, oil prices fell again and as of January 2020, the level is actually lower than before the killing. This clearly indicates that uncertainty alone will not drive up oil prices in the near future, this would only happen if an actual severe disruption of oil supply occurs. To summarise, it is not only very likely that the oil price will remain low in 2020, it is even possible that not even the occasional spike the market got used to will occur.

Any look ahead to 2020 for Oil and Gas will inevitably also have to address the energy transition, even though this transition has only just begun and will last much longer than only 2020. It is remarkable then how dramatic the shift in public opinion has been in 2019, despite the fact that scientific evidence on climate change is clear and that organisations such as the Intergovernmental Panel on Climate Change began to call for taking urgent action years ago. It now seems to be the case that something is going to happen – at least a “Climate emergency” has been declared. However, the fact that this shift appeared so suddenly makes it difficult to predict what is going to happen next. Will peak demand occur only in 2035 or earlier? How will public pressure on governments worldwide develop – and how will governments respond?

It is likely that a crucial determinant is going to be how apparent the effects of climate change become. It is widely reported in standard news outlets that 2019 was the second-hottest year on record, just behind 2016. What is more, the past five years have been the five warmest on record and the last decade has been the warmest. All this sounds certainly dramatic but is still relatively abstract.

The bushfires that are devastating Australia since October 2019 are much more tangible. The extent and the severity of these fires is linked by many researchers to climate change. Even though bushfires are very common in Australia, and the Australian government is not known for ambitious climate policies, now a discussion about the effects of climate change has started in Australia and it is possible that this will result in stricter emission reduction goals. However, not only governments are under pressure, the very same forces apply to organisations – and the Australian bushfires also provide an example for this.

Currently, public pressure mounts on Siemens, a large German automation company, regarding their participation in the controversial Adani Coal Mine in Queensland, Australia. The decision to not renounce plans to help develop this mine has been widely criticised, and there is a chance that Siemens’ reputation will be damaged.

This example vividly illustrates that individual decisions by companies can come under massive scrutiny by the public and is an essential message for organisations in general and for the oil and gas industry specifically.

One challenge for the energy transition is that the industry will have to convince the public that they are part of the solution and not part of the problem. What is more, a functioning industry that the public trusts is essential as the energy transition will require a considerable amount of investment and knowledge.

What makes the situation more complicated is that it is not easy to predict which case will make the news next and also how one specific incident affects the reputation of the industry as a whole.