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Economic analysts are warning that New Mexico could be unable to rely on its oil and gas industry as the market continues to struggle amid the COVID-19 pandemic.

Lease fees, royalty payment and taxes from oil and gas operations accounted for about 30% of the state’s budget in recent years, according to a study from the Institute for Energy Economics and Financial Analysis. The research also found that the industry provided about a quarter of the state’s operations budget last year.

But with the price per barrel of oil declining, the study suggests the financial support the industry offers New Mexico could be weakening.

Earlier this year, lawmakers faced a $400 million shortfall in the state’s budget which many attributed to declines in the oil and gas markets.

As of Tuesday, domestic crude oil was trading at about $41 per barrel, after a historic plummet in April — when the pandemic took hold in the U.S. — pushed the price to less than $0 per barrel for the first time in history.

Before the pandemic, oil was priced at about $55 to $60 per barrel, with the study reporting an average of about $48 per barrel between 2015 and 2019. Between 2010 and 2014, the average price of oil was about $86 per barrel.

That has meant shrinking operations in New Mexico where oil and gas development is centered around the Permian Basin. Baker Hughes reported an average of 45 active rigs so far in October, marking a 60% decrease since October 2019.

Most of those rigs were lost in recent months as the health crisis grew, the Carlsbad Current-Argus reported. The year had started strong at an average of 106 rigs in January and steadily declined through the spring and summer.

Tom Sanzillo, co-author of the report, said estimates show the average price of oil will remain as low as $43 per barrel through 2022.

“It’s an improvement over the historic lows hit in April 2020, but still far below what’s needed to return New Mexico to robust fiscal health,” he said. “The situation is unlikely to improve anytime soon.”

While prices have recovered some, they would need to stay at an average of $80 per barrels for several years, the study read.

Oil and gas reserves would need to rise quickly, while companies must be able to pay off debt. At the same time, fuel demand would have to increase significantly after plummeting due to the pandemic and travel restrictions.

“These features need to be in alignment, a scenario that is highly unlikely,” read the study.

Also blocking the industry’s path to recovery are high infrastructure costs, oversupply and increasing competition from the renewable sector.

“Consequently, the industry’s future is likely to be one of long-term decline,” the study read.

Sanzillo said New Mexico should diversify its economy to survive the inevitable busts of oil and gas.

“New Mexico can no longer expect oil and gas revenues to bounce back. But the negative outlook for the oil and gas industry does not have to be a negative outlook for New Mexico,” he said.

A Sept. 30 presentation from the Legislative Finance Committee warned that the reduction in drilling activity led to less revenue through gross receipts tax, especially in Eddy and Lea counties, from April to July.

Production in the 2021 fiscal year was expected to continue its decline between 13 and 30%, the LFC reported.

New Mexico produced about 368 million barrels of oil in the last fiscal year, and the LFC predicted production would drop to 260 million to 320 million barrels this fiscal year.

Production of natural gas was also expected to decline by 7 to 10%.

James Jimenez, executive director of child advocacy group New Mexico Voices for Children, said the state’s reliance on the industry led to drops in funding for education and other social services.

“For too long, New Mexico has been whipsawed by volatile oil and natural gas markets that our policymakers have no power to control,” Jimenez said in a statement. “… We need bold and innovative solutions from our policymakers to accelerate the diversification of our state’s economy, create a more equitable and transparent tax system, and strategically invest in proven programs that deliver better outcomes for our children.”

The San Francisco Chronicle, Editor: Adrian Hedden, October 30

After plummeting in April, oil prices have partially rebounded in response to a steep drop in production, particularly among OPEC and its partners. While consumption has risen from its lows in 2020Q2, it remains well below its pre-pandemic level.

The pandemic is expected to have a lasting impact on oil consumption, with demand only likely to fully recover by 2023. Oil prices are forecast to rise to $44/bbl in 2021 from a projected $41/bbl in 2020, as the gradual rise in demand coincides with an easing of supply restraint among OPEC+.

The main risk to the oil price forecast is the duration of the pandemic, including the risk of an intensifying second wave in the Northern Hemisphere, and the speed at which a vaccine is developed and distributed.

After rebounding from April lows, oil prices stabilized in 2020Q3

After plunging in March and April, crude oil prices saw a robust recovery in May and June, and averaged $42/bbl in 2020Q3. However, they remain almost one-third lower than their 2019 average.

The recovery in prices was helped by a sharp fall in global production

Especially by OPEC and its partners, known as OPEC+. The group agreed to cut production by 9.7mb/d, almost 10% of global oil supply. Supply also fell sharply in the United States and Canada. The rise in oil prices was also helped by a recovery in consumption as lockdown measures were eased and travel and transport began to pick up.

Unprecedented oil production cuts by OPEC+, strong compliance

Global oil production plummeted by 12% in May, falling from 100mb/d to 88mb/d, and has remained well below its pre-pandemic level. The fall was driven by OPEC+, which collectively agreed to production cuts of 9.7mb/d. Compliance with the cuts has been high, particularly compared with previous agreements. The group agreed to ease the restraints over two years, and this began in August with increased production of 2mb/d.

A further increase of 2mb/d is planned for January 2021, although this increase could be delayed if oil prices do not see a further recovery. One additional factor is production in Libya, which is a member of OPEC but is not subject to the OPEC+ agreement. Libya had seen production fall close to zero in mid-2020 as a result of internal geopolitical conflict, from an average of 1.1mb/d in 2019.

However, a nationwide ceasefire was announced in October and a robust recovery in oil production is possible in coming months.

Plunging output and weak activity in the United States

Oil production in the United States dropped by one-fifth in May amid plummeting demand and prices. While output has since recovered, it remains around 10% below its 2019 level. Investment in new oil production in the U.S is also very weak.

The oil rig count, a measure of new drilling activity, fell by 75% to reach an all-time low in August, although it has since seen a modest recovery. Survey results from the Federal Reserve Bank of Dallas suggest most U.S. shale companies do not expect a major increase in new drilling until the price of WTI increases above $50/bbl—$10/bbl above its current level.

As a result of low levels of new investment, oil production is expected to average nearly 3% lower in 2021 relative to 2020.

Weakness in oil consumption driven by collapse in air travel

Two-thirds of oil consumption is accounted for by transport. Of the three main transport fuels, jet fuel has been the most affected by the COVID-19 pandemic, given the collapse in air travel. Diesel, in contrast, has been the least affected , as it is used for shipping and road transport of freight, which have been boosted by e-commerce.

After reaching a trough in April, gasoline and diesel consumption in OECD countries have seen a recovery in demand and are expected to almost reach pre-pandemic levels by the end of 2020. However, the weakness in jet fuel consumption is expected to be significantly more persistent.

Oil consumption expected to be permanently affected by COVID-19

The pandemic is expected to have a lasting impact on oil consumption. Over the next few years, consumption is forecast to remain well below its pre-pandemic trend. In the longer-term, the pandemic is likely to affect oil consumption via a shift in people’s behaviors.

Air travel could see a permanent reduction as business travel is curtailed in favor of remote meetings, reducing demand for jet fuel. A shift to working from home may reduce demand for gasoline, but this could be somewhat offset by increased use of private vehicles if people remain averse to using public transport.

While the overall impact is difficult to quantify, concerns about future oil demand are already impacting corporate investment decisions. Some industry scenarios indicate that oil demand may have peaked in 2019, and several major oil producing companies have announced changes in long-term strategy, including a significant reduction in investment in new hydrocarbon projects, albeit with long horizons.

World Bank Blogs, Editor: Peter Nagle, October 30

For years, the oil industry drew in investors with sizable—and regular—returns. Even when oil prices fell, Big Oil found ways to keep paying dividends, even if it had to cut them, which happened only in extreme cases. Now, it is becoming increasingly clear that dividends—and profits—are no longer king. Today’s investors want other things from their oil investments.

Returns are not what they used to be

To be perfectly fair, returns are still important. They are just not the only reason for an investor to buy into or stay with an oil company. The sustainability of an oil company is garnering growing attention, too. But more on that later. Even if returns were the one and only priority of investors today, they would be unhappy.

Back in 2006, the average return on capital employed in upstream activities among Big Oil majors stood at more than 27 percent, a recent study by Boston Consulting Group revealed. In 2019, that average was no more than 3.5 percent. That’s before the pandemic pummeled oil prices and forced severe spending cuts. The oil industry’s returns, the study showed, had become much less resilient to price movements.

The difference is too stark to be brushed off as coincidental. Indeed, the authors of the study note that one marked change in the industry during the period between 2006 and 2019 was a shift in companies’ upstream asset portfolios.

The myths about shale and deepwater

Until about 2006, BCG noted in its report, up to 80 percent of Big Oil’s portfolio was made up of conventional oil and gas assets. Since then, they have gone into things such as deepwater and shale. And while investors have been hearing for years how production costs in both deepwater and shale are going down, this has not been the case for all deepwater fields or all shale plays.

Unconventional and deepwater exploration and production continue, overall, to be a lot costlier than shallow water and conventional oil wells. For deepwater, this is because of purely physical challenges such as, as the name suggests, depth. For shale, it is because of the capital intensity of fracking.

A focus has been put on the quick turnaround time of fracked wells: they take a lot less than conventional wells to start bringing in returns on the investment employed. But unlike conventional wells, they have much shorter life spans. In short, the promise of unconventional and deepwater oil has, based on the rates of investment return, fallen well short of promises.

The ESG path

Oil investors have been growing unhappy with Big Oil for a while now, ever since the environmental, sustainable, and social governance trend gathered speed. A growing number of people looking for a company to buy into now want to know that this company’s business is environmentally responsible. That’s not just out of altruistic motives. Investors are being told that climate change constitutes an existential threat for many companies, and the more environmentally responsible a company is, the greater chance of survival it has.

Obviously, oil companies are in a delicate place, to put it mildly, when it comes to environmental responsibility. But it is not as delicate a spot as many may imagine. Global demand for energy is growing, and it will continue growing for the observable future despite the pandemic. And this means that oil and gas will continue to be needed.

“On one hand, the energy transition is real and here to stay,” Bob Maguire, managing director of Carlyle Group, told the Energy Intelligence Forum as quoted by Argus Media. “On the other hand, there are 280mn cars on the road in the US today, 279mn of them running on oil, and the average lifespan of a vehicle is 12 years.”

Oil and gas will continue to be needed, but they would need to be produced differently to satisfy investors’ changing sentiment towards the industry. According to Boston Capital Group’s study, 65 percent of oil investors want companies to prioritize ESG factors over profits, even if this has a negative on said profits.

As much as 83 percent say Big Oil should invest in low-carbon alternatives to their core business. An even greater majority of 86 percent believe investments by oil companies in clean energy technology would make them more attractive for investors. That should provide a pretty clear picture of where Big Oil needs to go.

The way forward is not all green

Some would argue that Big Oil is already going in that direction, with the European supermajors leading the way with renewable energy investment commitments worth tens of billions. Others would counter that they are still only making promises but little actual work on changing their business.

Indeed, whatever Big Oil’s green ambitions, they would need to stick with their core business of extracting fossil fuels, too. They need the revenues from this core business to fund their renewable energy ambitions. But they could do this differently, too. The BCG study suggests reinforcing their focus on lower-cost production, taking steps to reduce the capital intensity, and pay more attention to risk mitigation. All that in addition to the clearly unavoidable diversification into alternative energy that should make them more resilient to oil price shocks in the future.

OilPrice.com, Editor: Irina Slav, October 30

Firm prepares to cut thousands of jobs worldwide as pandemic creates uncertainty. BP has warned that the oil market continues to face a volatile future because of the coronavirus pandemic as it prepares to cut thousands of jobs from its global workforce within weeks.

The oil giant returned to a modest underlying profit of $86m (£66m) in the third quarter but warned on Tuesday that the effects of the Covid-19 outbreak had created a “challenging” environment for the company.

The underlying profit, which is the figure most keenly watched by the market, was better than the $120m loss predicted by equity analysts, but was a fraction of the $2.3bn reported for the same quarter last year, because of the collapse of global oil prices.

The price of Brent crude averaged $42 a barrel in the third quarter, up from $30 over the previous quarter, when BP slumped to a $6.7bn underlying loss that included a string of writedowns on its exploration assets.

BP said the “ongoing impacts of the Covid-19 pandemic continue to create a volatile and challenging trading environment”, and added that the recovery remained uncertain.

The oil company delivered the warning less than a week after its share price plunged to lows not seen since 1994.

BP is cutting 10,000 jobs from its global business at a cost of $1.4bn to weather the downturn and help shore up its finances as it shifts towards low-carbon energy. Investor jitters over the global industry, and BP’s bold climate targets, have caused the oil company’s share price to tumble to 26-year lows of 200p a share in recent weeks. It fell further, down more than 2% to just below 196p a share, following the latest quarterly results.

BP said it had reduced its headcount by about 2,800 people so far, in part through a voluntary redundancy programme. Thousands more will follow in the coming weeks with BP aiming to complete the majority of the cuts this year.

Bernard Looney, BP’s chief executive, assured investors that the company would keep its existing dividend policy in place after reducing it by half in August, the first cut since the Deepwater Horizon oil spill in 2010. He also promised that the oil giant’s move towards low-carbon energy would be based on projects which offer strong returns.

“Having set out our new strategy in detail, our priority is execution and, despite a challenging environment, we are doing just that – performing while transforming,” he said.

Looney said in May that the collapse in oil market prices triggered by the coronavirus meant he was “more convinced than ever” that BP’s low-carbon transition was necessary. The company took its first steps into the offshore wind market months later by taking a $1.1bn stake in two US offshore wind projects being developed by the Norwegian state oil company Equinor.

BP’s energy economists have said demand for oil may never recover after the pandemic, which has taken a heavy toll on transport industries, and may be on the brink of an unprecedented decades-long decline.

The company slashed the value of its oil assets this year to reflect its view that oil price forecasts would be below expectations as a result of the pandemic. The write-offs led to a net loss of $16.8bn in the second quarter, but in the absence of further writedowns BP reported a fifth consecutive net loss of $500m for the last quarter.

The Guardian, Editor: Jillian Ambrose, October 30

The Abu Dhabi National Oil Company (Adnoc) said that its new trading entity Adnoc Trading has started derivatives trading as a direct market participant.

This represents a major milestone for the company, as it moves from being a traditional marketer of its products to a more sophisticated global trader.

Adnoc has incorporated two trading units, Adnoc Trading (AT), which focuses on the trading of crude oil, and Adnoc Global Trading (AGT) a joint venture with ENI and OMV that will focus on the trading of refined products. The new offices of both AT and AGT are located in Abu Dhabi’s International Financial Centre at Abu Dhabi Global Market (ADGM).

Adnoc Trading is now operational and Adnoc Global Trading is on track in establishing the required processes, procedures and systems to begin operations in the coming months. The AGT trading team are already optimizing Adnoc’s flows (crude, feedstock and product optimization), and, as its new trading systems are finalized will ramp up its activities.

By entering trading, Adnoc is able to offer a broader range of services to its customers and capture more value through new revenue streams from the sale of its growing crude and refined products portfolio. This significant step is a critical enabler of Adnoc’s 2030 strategy and its drive to become a more commercially-driven and performance-led organization.

Dr Sultan Ahmed Al Jaber, UAE Minister of Industry and Advanced Technology and Adnoc Group CEO, said: “This historic achievement is yet another important milestone for Adnoc as we become a more modern, agile and progressive energy company. Our steadfast focus is on providing a better service to our customers, while also stretching the margin from every barrel of oil that we produce, refine and trade. Our move into trading supports both of these goals.

“The opening of our trading offices at Abu Dhabi Global Market (ADGM) further reinforces its position and reputation as a leading and growing commodities trading hub for our nation and the Middle East region.”

The opening of its trading offices further demonstrates Adnoc’s resilience in overcoming the unprecedented challenges of the Covid-19 pandemic.

Khaled Salmeen, Executive Director of Adnoc’s Marketing, Supply and Trading directorate and Chairman of Adnoc Trading said: “Adnoc has continually adapted during Covid-19 to deliver on its commitments to domestic and international customers, including our landmark move to forward pricing of Abu Dhabi crudes. In 2020, our plans for Adnoc Trading and Adnoc Global Trading become a reality. In the weeks and months ahead, Trading will become integral to how Adnoc manages its business, helping us to better manage our product flows, deliver greater efficiencies, and provide our customers with a broader service and more integrated solutions.”

Safeguards are in place to oversee and track all trading activity. The trading systems used by AGT and AT have undergone thorough testing to ensure that they are ‘air-tight and water-tight’ before operations begin. In order to manage and control risk, the expert trading teams use a suite of energy trading and risk management systems that cover the full life cycle of every trade.

The establishment of Adnoc’s new trading entities is part of the company’s broader transformation in its customer-facing Marketing, Supply and Trading directorate (MS&T). Adnoc’s marketing arm is moving from a supplier that customers historically collected products from, to a more customer and market-centric, shipping & integrated logistics, storage and trading organization.

By better integrating its marketing related companies and capabilities, Adnoc will provide a broader service to its customers, better manage and optimize its product flows and ultimately deliver greater value to its customers, its shareholders and the UAE.

In shipping, Adnoc Logistics & Services (Adnoc L&S) is the largest, fully integrated logistics and shipping company in the UAE and provides highly specialized services that cover the entire oil and gas supply chain. Adnoc L&S is expanding its merchant fleet in line with Adnoc’s growing upstream and downstream portfolio and the company’s move into trading.

In storage, in addition to substantial storage in the UAE and international storage in Japan and India, Adnoc announced in 2019 a strategic investment in global storage terminal owner and operator VTTI BV (VTTI). VTTI is an independent global owner of 15 hydrocarbon storage terminals across 14 different countries, many of which are in locations that are complementary to Adnoc’s trade flows.

Finally, by entering trading, Adnoc will be able to provide a wider offering to its customers, more nimbly take advantage of changing market dynamics, and better manage its product flows, assets and risks.

Trade Arabia News Service, October 30