Oil Market Industry Challenges During Pandemic

The petroleum, oil and gas sector is in the midst of its third price drop in less than a decade. Following the first two shocks, the industry recovered and business resumed as normal. Unfortunately, the same cannot be said for this period. The present environment is characterized by a supply shock, an extraordinary decrease in demand, and a worldwide humanitarian catastrophe.

Additionally, the financial and structural health of the industry is worse than it was during past crises. The introduction of shale, an oversupply of supply, and liberal finance markets that ignored capital discipline constraints all led to low returns. With prices nearing 30-year lows and social pressure increasing, CEOs recognize that change is unavoidable. The COVID-19 issue exacerbates what was already building up to be a watershed event for the business.

While the extent and length of this crisis remain unknown, McKinsey study indicates that without substantial reform, it will be impossible to restore the industry’s historically favorable performance. On its present trajectory and pace, the sector may be approaching an age characterized by strong rivalry, fast supply response enabled by technology, flat to falling demand, investor skepticism, and growing public and government pressure on climate and environmental impacts.

However, oil and gas will continue to be a multitrillion-dollar industry for decades in the majority of scenarios. Given its critical role in providing cheap electricity, it cannot fail. Thus, the key issue is how to generate value in the new normal.

To shift the industry’s present paradigm, it will need to dig deep and draw on its historic history of daring structural changes, innovation, and safe and profitable operations under the most adverse circumstances. The victors will be those that aggressively restructure their portfolios and change their operational methods during this crisis. Businesses that do not will eventually reorganize or perish.