2021 – a year of uncertain hopes, fragile agreements and new sources
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Last year brought no shortage of serious tests for the energy sector the world over.

  It started with oil prices at a healthy level and companies harbouring a cautious optimism, only to be hit by the COVID shock, a sharp fall in demand for oil and the collapse of oil trades.

   Owing to the pandemic and agreements clinched within the OPEC+ framework, Russia’s oil production slid to a 10-year-low of 512 million tonnes. Saudi Arabia cut production by 19 % — from 11 million barrels per day to 9 million bpd. And the U.S. oil sector was marked by an acceleration in the processes of mergers, acquisitions and bankruptcies among shale and service companies.

      Prices then began a cautious rise, but against the background of the pandemic, the transfer from oil and gas to green energy technologies appeared to be an increasingly topical and real trend. A cautious awareness took hold in the market that perhaps the world might not need fossil fuels in such great quantities.

    And the issue of how the oil and gas industry might develop or change over the course of the year ceased to be just idle chatter.

Ignore COVID at your peril

    It had become clear for some time: all those vaccines notwithstanding, COVID was not going to go away – at least not this year. The virus would be the main factor determining the situation not only in the energy sector but also in the economic, social and other aspects of daily life.

    The world, of course, placed great hopes on vaccines, but even if they proved successful, the effect was unlikely to be felt very quickly.

    According to Dmitry Marinchenko, Senior Director, Corporates at Fitch Ratings, the effect of vaccinations on the world economic outlook was unlikely to have a positive effect until the vaccines became a world-wide phenomenon.

    “The positive effects of vaccination programmes on the oil demand recovery may not be visible for several months until a critical mass of population is inoculated,” Marinchenko said in a note on oil prices.

     Given these conditions, the situation in the energy sector – and in the world economy as a whole – will depend on the risks of new restrictions being introduced limiting people’s ability to travel freely.

    But experts recognise the difficulties at forecasting where lockdowns may occur and the effects they might have – the longer the pandemic drags on, the more varied the reactions of countries affected by it. Some have imposed curfews or tough measures on travellers entering the country or even cut communications, while others reopen theatres and hope to revive domestic tourism.

    The leading role of OPEC +

    The deal reached on limiting oil output by OPEC and non-OPEC countries will continue to be the main factor on energy markets. And the key role in ensuring balance and limiting volatility on those markets will be the extent of mutual agreement among those included in the deal.

     Under agreements reached by OPEC+ countries in December, Russia and Kazakhstan were permitted to boost oil production in February and March while Saudi Arabia and other countries continued voluntarily to reduce theirs. And the deals carry risks of unpredictability in any further decisions OPEC+ may take.

    As Fitch’s Marinchenko noted, this could lead to disagreements among signatories to the agreement and potentially make he alliance less efficient in managing production levels.

    On the whole, the oil industry is cautious in believing in the deal. Andrew MacGran, President of Chevron, said the agreement would remain in effect at least until the end of the year and perhaps longer. Speaking at the beginning of December, he said that oil prices and levels of demand showed that the OPEC+ agreement would operate in a short-term perspective.

Motionless in the shale industry

    According to Fitch, the shale industry in the United States will be unable to restore pre-crisis levels for another two to three years. Although U.S. oil companies have resumed production to some extent after sharp falls linked to COVID, levels remain nearly 60 % lower than a year ago. Companies facing financial difficulties are in the first instance trying to optimise expenses and provide a return on investment before investing in new production. 

    The U.S. Department of Energy forecasts that oil production in the country will dip by 0.2 million bpd in 2021 compared to last year and will amount to, on average, 11.1 million bpd. The department linked the fall to lower levels of drilling and lower oil prices. That will mean a decline in production for two years in a row. But it is forecast to rise in 2022 by 0.4 million bpd.

    The department also expects gas production will fall by 2 % to 95.9 billion cubic feet per day in 2021 but will rise by the same 2 % the following year to 97.6 billion cubic feet.

     The main trend in the U.S. shale industry is expected to be a continued round of mergers and acquisitions as part of a consolidation of actors on the market. But it must be added that shale oil production is a much more flexible and rapid cycle – any recovery linked to an increase in demand will take hold more quickly.

    The International Energy Agency (IEA) believes that any recovery of oil prices would lead to increased oil production in the United States.

    “For now though, companies seem committed to pledges made to keep production flat and instead use any price gain to pay down debt or to boost investor returns,” the IEA said in its January 2021 oil market report.

    Wood Mackenzie analysts expect a “blockbuster” in the U.S. shale industry. It said all the conditions for “mega-consolidation” were present.

Financially strong companies, it said, can exploit their advantageous cost of capital and mergers can allow for risk and ensure necessary financing.

    “As a result, we think we will see a blockbuster deal (in 2021) that will send shockwaves through tight (shale) oil,” it said in a December report.

     It predicted “two big names will get together. Maybe even three” and as many as three “storied names” would be retired.

Russian oil to focus on digitalisation and Bazhenov

    In Russia, the crisis in 2020 led to a realisation that it was vital to invest in complex intellectual technological process which, in the long run, will reduce costs of working oil deposits. All major oil companies stressed the importance of a transition to a digital model of operating at production sites enabling them to proceed with “difficult” deposits located in areas benefitting from modern infrastructure.

    Acting along those lines would avoid the need for heavy investment in high-risk, large-scale projects in the Arctic.

    The most promising development is “difficult” shale oil of the Bazhenov Formation in western Siberia, where total reserves are estimated to range from 18 to 60 billion tonnes. Production in the region is expected to become a profitable undertaking from the end of this year. Gazprom Neft and its “Bazhen” techological centre are proceeding with work in the Salym section of the Khanty-Mansysk region of Siberia. Rosneft and Zarubezhneft are also seeking to become involved in Bazhenov and in the region’s Domanik rock deposits.

    In 2019, the cost of extracting Bazhenov oil stood at 16,000 roubles ($210) a tonne and the goal in 2020 was to reduce that figure to 13,000 roubles a tonne. It is now expected that the cost in 2021 will be cut to the profitable rate of 8,500 roubles a tonne.

    Taking into account the Bazhenov Formation, Russia holds the world’s largest deposits of shale oil. This, of course, should have been undertaken before, but as oil stands to remain the most important source of energy for some years to come, the importance of the Bazhenov Formation cannot be underestimated.

Demand on the rise, slowly but surely

    According to OPEC forecasts, world demand for oil in 2021 will rise by 5.9 million bpd and total 95.9 million bpd. And the driving force behind that rise will be China, India and other Asian countries. The IEA sees oil demand rising by 5.5 million bpd to 96.6 million barrels with most of the increase coming in the second half of the year.

    World oil supply will rise by 1 million bpd, with due accounting for reductions of 6.6 million bpd in 2020, mostly from OPEC member-states. And while production in the United States will not increase, OPEC+ countries could restore their market share lost since 2016, the IEA says. And a resumption of airline activity could prompt an increase in demand.

Returning to the skies

   According to figures from the International Air Transport Association, airlines throughout the world may have lost more than $100 billion as a result of COVID. Losses of Russian companies could total 70 billion roubles ($920 million). IATA forecasts that the world market could take about three years to recover. The Russian market, owing to the country’s sheer size, could recover much more quickly, and could well reach pre-crisis levels by the end of the year.

    Like everyone else, airlines are pinning their homes on vaccines in enabling people more or less to resume free movement. Statistics from 133 world airports, compiled by Bloomberg NEF, show that in the first week of March, airlines could double the number of flights operated compared to a week’s activity in January. Flights could rise by a factor of four in Europe.

    Oil traders, however, remain skeptical about such forecasts. Dutch company Vitol believes that no rise in passenger flights will take place before the third quarter of 2020.

Stronger wind and sun

    The oil and gas industry could well come up against another serious challenge – strong competition from renewable energy sources. The New Year started with considerable growth in renewables and the trend is set to continue. This is underpinned by China’s pledge last autumn to achieve carbon-neutral status by 2060 – meaning the expansion of what is already the world’s largest market for solar and wind energy. Record levels of growth could be seen over the next five years.

    And strong growth of renewables will also be seen in Europe. In the midst of the pandemic, the share of renewable energy sources in Europe’s energy balance rose significantly to account for 40 % of power.

    Woods Mackenzie predicts that prices this year on agreements to purchase solar energy will fall to a new low of $13 per MW. And this will occur not only in the Middle East with its favourable climate for cheap solar energy, but also in Spain and Chile. Other analysts believe that the diversification undertaken by oil companies last year in favour of low-carbon electricity can only accelerate. The list of world companies declaring their intention to achieve zero carbon emissions will grow under pressure from investors and regulating agencies in different countries.

    And not to be forgotten is that the world has gained a powerful opponent of new oil projects and an keen ally in the fight against climate change in new U.S. President Joe Biden.

    On his first day in office, he struck down completion of the construction of the Keystone XL oil pipeline from the Canadian province of Alberta to the U.S. Gulf of Mexico coast. It is clear that the new president will back no new projects linked to fracking – the force behind the “shale revolution”. Some analysts say the United States is reaching a peak in gas production – another factor leaving room for growth of renewable energy sources.

    Electric vehicles join in the world race

    The development of more powerful batteries and accumulators for energy storage will play a big role in the development of renewables. It is clear that the boom of energy storage accumulators will continue apace in the United States.

     According to Woods Mackenzie and the Energy Storage Association, in the third quarter of 2020, the capacity of new accumulators in the country more than doubled compared to the second quarter figure, thanks largely to projects in California. And that will speed along the transition of the auto industry to electric vehicles.

    Analysts believe more and more electric vehicles will be sold in 2020. Woods Mackenzie puts its forecast of increased sales for cars other than petrol vehicles at 74 % — or up to 4 million. That figure will still account for only 5 % of world sales, but electric vehicle sales will continue to receive a boost – and results — from China and Europe as well as the United States.

    And the electric vehicle industry will receive a further boost from restrictive measures to be introduced in conjunction with campaigns to reduce carbon emissions.

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