Surviving Multiple Crises, Thriving in the AftermathBy Pedro Alcalá | Mon, 06/14/2021 - 15:38
As participants in the oil and gas industry continue executing their plans for 2021, they can look back at the impossible odds faced in 2020 and take comfort knowing they emerged mostly intact, if somewhat scathed. It was not just COVID-19, however, although that had the biggest impact. In fact, the industry was already on the brink when the pandemic hit.
The hydrocarbons sector might have been the only segment to face historically dire circumstances that were not exclusively connected to the pandemic. The drama playing out in the sector was clearly evident when the price of oil turned negative in the spring, led not only by lower demand levels brought by the pandemic but also by a global production crisis that international organizations were still attempting to mediate. The world was privy to the sight of tankers moored near ports all over the world, waiting for a hypothetical future date at which offloading would prove economically feasible, let alone profitable.
Mexico’s economy was hit particularly hard by all of these circumstances due to the role that PEMEX plays in its public finances. By the time the production crisis was coming to an end and after a politically contentious negotiation process, the Mexican government had to let Mexico join the list of oil-producing countries agreeing to a decrease in production for the sake of the market’s health, a particularly bitter pill for this government to swallow given that a central aspect of its strategy was based on stabilizing PEMEX’s historic production decrease.
Even in the midst of the crisis, however, MBN experts pointed to an imminent recovery. “Everybody is affected by the crisis and it would be unwise for anyone to say they know the outcome. Unquestionably, there is huge competition now to gain a large part of the global energy market. This is happening in response to the impact that the rise of the US shale market had on global prices. What has happened is a direct expression of that competition and what I perceive, compounded by the effects of COVID-19, is a huge market overreaction,” said QRI Chairman and CEO Nansen Saleri in April 2020. According to Saleri, a price below US$20-US$30 would be unsustainable in the midterm due to the world’s energy demand of around 95-99MMb/d. “A sustained price in this range would erode the global market’s ability to deliver this required volume. My own view is that the markets will self-correct and prices will return to a number above US$30,” he said.
However, not everybody was similarly certain. “Whenever forecasts are made, assumptions are also made and one of the main assumptions in oil and gas is the price of oil. Previous forecasts were made based on assumptions of a specific price for oil but this price has changed dramatically. As the dust settles, the industry will be able to reassess its position,” said Merlin Cochran, Director General of AMEXHI, in May 2020. By April 2021, Cochran had a clear-eyed view on the path to recovery that the industry had embraced: US$40 billion of approved investment and US$16 billion of executed investment, along with US$1 million invested in national content, six resource discoveries and a 40 percent increase in reserves. “Many people asked us about production levels but we emphasized that approximately 70 percent of our members’ contracts are still in their exploration phase. We chose to highlight metrics that are not only more relevant given the kind of development taking place in these fields but also due to the conditions imposed by the pandemic that affected 2020. Some figures included numbers on employment created by our members’ activities. Surprisingly, job numbers increased in 2020 when compared to 2019.”
Cochran’s narrative has become a standard for the industry. An understanding has developed of the recovery that the industry experienced toward the end of 2020 and its advances to meet its goals in 2021. Most major operators have made it clear that 2020 might have changed certain points of their strategy but it did not change their positive outlook on Mexico. “One of the most important lessons that we learned was to improve the adaptability of our operational processes. We concentrated our efforts on protecting the health of our employees and contractors. Fortunately, we have not stopped operations throughout the entire pandemic,” said Andrés Brügmann, Mexico Country Manager of Fieldwood Energy, in April 2021. Alberto Galvis, CEO of Citla Energy, agreed with this sentiment: “2020 provided challenges and obstacles to the entire industry, and we have been no exception, but these problems have not changed our strategy. However, our activity plans were adjusted following the initial well results coupled with the effects of COVID-19 and 2020’s extreme oil price environment.”
This understanding of the industry’s recovery curve was not limited to the country’s major operators. The more independent service providers, whose collective support for the industry is indispensable, also found a path forward through the crisis. In May 2020, Kasoil Director General Jeimy Mathison already understood the adaptation process in terms of a positive outlook: “Despite the crises, we have been able to continue our work remotely through a variety of digital tools. In fact, through these new working methods we have been able to make our delivery times more efficient without increasing costs.” Jiménez was also hesitant to compare this moment in the industry’s history to other downturns, both in Mexico and in other countries: “There are too many factors and variables left to be defined and way too much uncertainty. Despite all this, we must continue with our operations. Considering the obvious risk involved, our perspective on the matter continues to be positive. We base this outlook on the fact that oil and gas will continue to be a strategic and essential sector for the Mexican economy, which will lead to protective measures being enacted by the state.”
Jiménez also pointed out that all of these situations proved to be the necessary impetus for companies to adopt technologies that were in the pipeline for the past few years. “I am convinced that the industry at large, not only in Mexico, has entered a new phase of efficiency. To simply have the intention of becoming efficient is no longer accepted. Companies and people must try to be efficient,” agreed Saleri, who highlighted two main factors: capital efficiency and operational efficiency. Saleri said these two elements require significant sophistication to analyze different alternatives, which cannot be done with conventional, pedestrian methodologies. “The power of AI, advanced analytics and machine learning are central to this. That is why old methods will continually fade from modern management decision-making. This applies specifically to PEMEX. I am encouraged to say that the response we are receiving from PEMEX is that the company is eager to embrace the new generation of techniques and the new methods of doing business.”
Despite the fact that companies in the industry have been able to restructure their activities to increase their resilience through these difficult times, it is also true that the actual recovery arc of the industry, in terms of market indicators, continues to be slow. “So far, the government has been able to fulfill its price commitment because, after the world oil market crisis of April 2020, demand has not fully recovered and international prices, which were down for several months, are just beginning to recover as the economy recovers too. The financial, industrial and operational difficulties of PEMEX Transformación Industrial have led to an accelerated loss of market share for fuels imported or produced by the state-owned company,” stated former PEMEX independent board member and current adviser to the Senate in matters of Energy Fluvio Ruiz Alarcón.
Still, 2021 is certain to be defined by the successes of public and private organizations in the industry that had an opportunity to learn many lessons in 2020, according to Cochran. “The last time we had this price drop it was due to increased production from shale producers. When prices dropped, everybody thought that the shale industry was dead. Shale managed to thrive, but it did so within the new reality of oil prices. This is the same for oil: it will thrive but it must reinvent itself. It is time to seek new technologies and to apply them. This reinvention will not happen overnight, but as some of the industry’s foundations are now shaking, there will be many more opportunities to innovate. We look forward to seeing where the future takes us.”