draft covid-19 and opec+ short term oil and liquids demand ... · 101.2 mbpd 2020 (baseline) global...
TRANSCRIPT
D R A F T
May 2020
COVID-19 and OPEC+
Short term oil and liquids demand and supply scenarios
2COVID-19 and OPEC+_IMCA2020LON
As oil and liquids markets absorb COVID-19/OPEC+, short term scenarios help
business planning
• Oil markets are being severely disrupted by COVID-19 and the actions to mitigate its spread.
Magnitude and speed of demand destruction is unprecedented. OPEC+ have defined an initial plan
to constrain an oversupplied storage infrastructure and market
• Bain’s scenario approach focuses on major disruptions that can drive different industry
outcomes. In this case, short-term dynamics are being disrupted by unprecedented demand
destruction and plausible supply responses to potential storage constraints and prices
• COVID-19 has such a dramatic impact on demand that we started there and devoted our first
webinar to three demand scenarios
• Scenarios are developed in the service of answering questions critical to business planning:
Depth and length of the downturn? OPEC+ and major producer supply responses? Timing and
duration of potential storage constraints? Different pricing mechanisms during the recovery?
C O N T E X T
3COVID-19 and OPEC+_IMCA2020LON
Short term oil and liquids demand scenarios, COVID-19 impact
Five pathway archetypes20 countries, nine sectors Three envelope scenarios
• Observed all available data
(baseline, and COVID impact)
for the largest 20* countries
(>75% of global oil demand)
• Mix and impact on 9 demand
sectors (industry, cars, truck
freight, air freight, passenger
flights, ship, rail, buildings, and
non-energy) by country, RoW
• Identified 5 pathway archetypes
with a different demand
destruction, trough and
recovery profiles for each
• A country/market’s pathway will
have a huge impact on the
shape and size of demand
destruction, focus on 2020 and
into 2021
• Not all demand pathways are
likely available in every country,
but countries and RoW have
alternative outcomes
• Our three plausible scenarios
are based on country fit to
pathways and link to Bain’s
**Marco Trends Group Covid-
19 economic outcomes,
*US, China, India, Japan, Saudi Arabia, Russia, Brazil, South Korea, Canada, Germany, Iran, Mexico, Indonesia, UK, France, Thailand, Singapore, Spain, Italy, Australia
** Bain Marco Trends Group https://www.bain.com/insights/topics/coronavirus/
B A I N A P P R O A C H
4COVID-19 and OPEC+_IMCA2020LON
Start point: Archetype pathways with to areas of material uncertainty
Months
Oil & Liquids demand (indexed to 100)
Oil
demand
decline
Trough Recovery Stabilization
A C
B
D
E
Period of demand
decline
Total months
to reach
troughA
% Mbpd from
pre-virus
normal
Aggregate drop in
demand vs. baselineB
Period of troughTotal months
in troughC
Period of recovery
Total months
to reach new
normal
D
Stabilization level vs.
baseline
Total % Mbpd
from baseline
after recovery
E
Stable growth rate
vs. baseline
New growth
rate compared
to baseline
F
F
I L L U S T R A T I V E
A F
A R C H E T Y P E P A T H W A Y S
5COVID-19 and OPEC+_IMCA2020LON
Bain global oil and liquids demand scenarios developed from market/country
pathways describe a ~9 to 20% aggregate demand reduction vs. the 2020 baseline
What you would have to believe
• ‘Faster recovery’: US, India, China
effectively contain the virus (pathway 2);
oil demand recovers by end of Q2. Major
European economies delay containment
(pathway 3), but recover by end of 2020.
• ‘Moderate recovery’: China effectively
contains spread (pathway 2); developed
economies (US, Europe) need longer-
run partial lockdowns to recover by end
of 2020 (pathway 3); emerging markets
struggle into 2021 (pathway 4)
• ‘Slower recovery’: virus reemerges in
China (pathway 4) and continued spread
in developed markets leads to deeper
economic impact into 2021 (pathway 4).
Some emerging markets institute long-
run lockdowns but ultimately are forced
to let the virus run its course (pathway 5)
P R E L I M I N A R Y
Note: 2020 baseline based on 2017 and 2018 growth projections
101.2 Mbpd
2020 (baseline)
Global oil and liquids scenarios 2020 full year demand vs. baseline
~(9) Mbpd
~(13) Mbpd~(20) Mbpd
“Faster recovery” “Moderate recovery” “Slower recovery”
G L O B A L D E M A N D S C E N A R I O S
6COVID-19 and OPEC+_IMCA2020LON
Oil and liquids demand decline by end use segment and scenario
Insights
• ‘Faster Recovery’: deep
15-20% trough of total
demand, recovery
relatively swift and global
demand is almost back
to baseline by Q4 2020,
except aviation
• ‘Moderate Recovery’:
presents the industry
with a severe and longer
trough of over 20% lower
demand and sluggish
recovery into 2021
• ‘Slower Recovery’: slow
recovery with quasi-
command economy
structure and 25-30%
GDP destruction
P A T H W A Y O U T C O M E S I L L U S T R A T I V E
“Faster
recovery”
“Moderate
recovery”
“Slower
recovery”
7COVID-19 and OPEC+_IMCA2020LON
Reading the future demand signposts will give a directional sense of direction, inform
choices and (potentially) trigger the re-definition of a new set of scenarios
D E M A N D S I G N P O S T S
Moderate
Recovery
Slower
recovery
Faster
recovery
Today
Future
Scenarios with more
better-case themes
Scenarios with more
worse-case themes
Days
Weeks
Months
Signposts… …can be read at trigger points over time… …to indicate direction
Good strategy under uncertainty allows a company to move faster than others based on reading the signposts
S I G N P O S T S N O T E X H A U S T I V E
Public response, e.g.
bans on travel, movement,
social behavior changes
Virus reaction, e.g.
hospitalization rates,
new hot spots,
new effective treatments
Economic impact, e.g.
unemployment, GDP,
actual sector demand
Nationwide
lockdowns
Weaker gov’t
response or
compliance
Hospitalization
rate decreasing
Continued
exponential
spread
Continued
growth, but
slower
Flight miles and
passenger car
miles “bounce”
Continued
furloughs
Employers begin
re-hiring at scale
S I M P L I F I E D
8COVID-19 and OPEC+_IMCA2020LON
Demand side observations
• Develop bespoke scenarios solving for the market outcomes that matter most to you
– Aim to understand the plausible range of what could happen – not a point specific “planning case”
– Define signposts and leading indicators to track speed and direction of macro- microeconomic evolution
– Set trigger points to facilitate rapid and thoughtful response to unfolding events
• Consider how all signposts and trigger points should influence all aspects of your business
– It’s about strategic moves, investments, and cost reductions
– and stakeholder & investor communication plans, human capital crisis response plans, and the rest
• Plan now / act now. Start thinking about how “temporary” ways of working and reactive cost cuts could
translate into permanent, structural improvements in efficiency and effectiveness.
– Right size the organization; prepare for “new normal” at a market and end use segment level
• Prioritize your portfolio (assets / business lines / geographies) ruthlessly – build around positions of
(potential) leadership economics
– Focus M&A / divestitures to concentrate scale where scale matters most (not just to consolidate)
O B S E R V A T I O N S
9COVID-19 and OPEC+_IMCA2020LON
Depending on demand shock severity, we expect the sustainable recovery window
between Q2 2020 most optimistic, and Q4 2021 in the most negative
I N T E G R A T E D D E M A N D A N D S U P P L Y S C E N A R I O S
“Faster recovery” “Moderate recovery” “Slower recovery”
Demand
Supply
Short-term, severe but disciplined
correction, risk of accelerating too fast
Deeper and longer shock, storage
constraints hit, drive need for greater
action and significant shut-ins
• Global storage capacity holds, just…
• Supply drawdown, returns and new
additions required as of Q3 2020
• Will likely hit global storage capacity in
~3 months
• Supply additions required in Q1 2021
• Will likely hit global storage capacity in
~2 months
• Supply additions not required until late
Q3 / Q4 2021
Protracted demand loss, insufficient
and unmanaged supply constraints
drive fragmented reactions and
widespread shut-ins
Demand
Supply
Source: Rystad; Bain
10COVID-19 and OPEC+_IMCA2020LON
Weaker oil price through the crisis, but planning cases vary significantly by scenario
O I L P R I C E P L A N N I N G I M P L I C A T I O N S
Half-cycle cost curve
(~$35-45/bbl)
Short-run
marginal cost
($10-25/bbl)Half-cycle
cost curve
(~$35-45/bbl)
Short-run
marginal cost
($10-25/bbl)
Short-run
marginal cost
($10-25/bbl)
Shut-ins ($10-15/bbl)
Shut-ins
($10-15/bbl)
Note: Price bands are based on Brent oil price and adjust for regional differences in Brent
Source: Macrotrends, Rystad, Bain
• Overall, price and market mechanisms
based on cost curves are still at work
• While storage is building (to Q3), short-
run marginal cost (production OpEx)
sets the pricing band
• Once additional production is needed
(Q3), and the half-cycle cost curve (to
induce new drilling) takes over…
• …but the pricing build will be slow,
held back by storage draw & OPEC+
• Traditional market mechanisms begin
to break down in order to force shut-ins
• Shut-in economics are complicated,
and highly asset/operator specific
• Severe pricing impact will vary locally to
induce mass shut-ins; netback prices
break connection to benchmarks
• New drilling likely in Q1/Q2 of 2021,
but prices and activity held down by
shut-in reversals, storage draw, OPEC+
• Global benchmark prices generally
lose relevance as production decisions
mainly driven by non-economic factors
• Lack of storage capacity induces shut-
ins earlier, with more price pressure
earlier
• Protracted demand loss, with reversals
of shut-ins able to supply all incremental
production until at least late 2021
• Significant structural damage to assets,
balance sheets, fiscal regimes
“Faster recovery” “Moderate recovery” “Slower recovery”
11COVID-19 and OPEC+_IMCA2020LON
Integrated demand/supply scenario impacts on production capacities: US / Canadian
production likely hit hardest in slower recovery scenarios
Insights
• OPEC+ cuts account for roughly
6M bpd, on average, in each
scenario. Additional cuts required
with Moderate to Slower recovery.
• Storage capacity provides an outlet
for excess oil supply, but likely not
sufficient to avoid further shut-ins
• Moderate to Slower recovery, the US
and Canada (with non-OPEC
countries) likely to see significant
shut-ins.
• IOCs, independents increasingly
impacted in tough scenarios.
Balance sheet and local demand
factors will be a differentiator in an
intensely competitive landscape.
I N T E G R A T E D S U P P L Y S C E N A R I O S
Production cuts – impact by player / oil type / country
“M
od
era
te
rec
ove
ry”
“F
as
ter
rec
ove
ry”
“S
low
er
rec
ove
ry”
Legend
Players:
Oil types:
Country:
NOC
IOC
Other
DW
Offshore
Onshore (conv)
Shale
Oil sands
OPEC+ US / Canada
Other
D I R E C T I O N A L
Source: OPEC, Rystad Energy, Bain Analysis
12COVID-19 and OPEC+_IMCA2020LON
Oil & liquids scenarios, key questions and implications for the industry
Q & A
• How long and deep do we expect the
downturn to last and when do we
return to a “new normal”?
• Who is exposed to potential supply
reductions? What are impacts on the
price setting mechanism?
• What are the right signposts to
navigate by in the midst of uncertainty?
• How to anticipate lasting structural
changes to demand, supply and price?
Return as soon as mid Q3 2020 or as late as Q4
2021, signposts indicate we are closer to
scenario 2 would imply mid Q1 2021 from a Q2
2020 -20Mbpd trough
Scenario 1 OPEC+ cut foundation, increased cuts
required across the industry moving to 2 and 3.
Price follows but in 3 local economics overwhelm
Local segment demand will be the key indicator
for oil and liquids demand fall and recovery,
transport and especially car/trucks
If the industry can remain in bounds of 1 and a
managed 2, basic industry structure, economics,
price mechanisms can hold, in scenario 3
anticipate / plan for radical change
• [email protected] Partner, Head Global Oil & Gas Consulting, Milan
• [email protected] Advisory Partner, Global Oil & Gas Practice, Houston
• [email protected] Partner, Global Oil & Gas Practice, Houston
• [email protected] Principal, Global Oil & Gas Practice, London
For further information please contact: