An accelerated post-pandemic recovery and skyrocketing demand disrupted the oil and gas industry, a problem further amplified by the current war in Ukraine. During the last several months, we have witnessed oil and gas prices skyrocket and wreak havoc on consumer and corporate activities.
But are businesses, consumers, and governments doomed to play a passive role in market reorientation?
Let’s dive deep and look at the global oil and gas landscape.
How did we get here?
Oil production, measured by the number of crude oil barrels per day, is currently slightly below pre-pandemic levels. The graph below shows where we stand regarding the supply and demand of oil.
On the demand side, the Organization of Petroleum Exporting Countries (OPEC) maintained its forecast that world oil demand will keep rising until the end of 2022.
Around 40% of oil in the world comes from only three countries: the U.S., Saudi Arabia, and Russia. It’s also worth mentioning that China is the fourth producer. Together, these first three countries produce more oil than the rest of the top ten combined. At the same time, China and the US, respectively, import the most oil nationally, with China representing around 250 billion USD annually.
The Ukraine war sent oil briefly above $120 USD per barrel during March, its highest level since 2008, worsening inflationary pressures. However, oil prices have been decreasing since then, which relies on the current low economic growth combined with the increase in supply. As of late September, Goldman Sachs analysts sharply lowered its oil price forecasts due to this slowdown but said crude oil will probably climb from current levels under tight circumstances.
What about the current gas scenario?
The U.S. is the world’s top-producing country of natural gas, followed by Russia. Some critics might argue that Russia is utilizing the main Nordstream pipeline as a weapon to leverage national interests, forcing EU countries to look for Qatar, the U.S., and Central Asia nations to strike deals for both natural gas and liquified natural gas (LNG) a more easily transported form of gas, usually shipped by sea. However, the problem with this approach is that the current infrastructure is not built to sustain gas imports that can replace Russian gas. Issues with the Nordstream pipeline have been reported recently, with a mysterious pressure collapse occurring overnight in late September.
The current energy crisis is particularly dangerous and pronounced in Europe because, as of the onset of the war in February, EU members relied on Russia for 40% of their natural gas.
The energy crisis is not the only visible outcome of the ongoing war. All of Ukraine’s industries were hit. They are one of the world’s top agricultural producers and exporters and play a critical role in supplying oilseeds and grains to the global market. Their main export product is agricultural products, totaling 27.8b billion in 2021 and accounting for 41% of the country’s $68 billion in overall exports.
It’s clear Ukraine plays a major role in world trade. With their industries disrupted due to the invasion, this impacts every one of us by creating an imbalance and unprecedented set of events that make it hard to forecast and think about returning to normality in the short term.
How have EU members responded?
EU countries have been imposing new sanctions on Russia since the Russian invasion of Ukraine on February 2022. It’s important to mention that Russians were already being sanctioned since 2014 for their annexation of Crimea, including individual targeted sanctions, economic sanctions, and diplomatic measures.
The aim of the economic sanctions is to reprimand Russia for its actions and diminish their abilities to continue. However, there are no sanctions on Russian food exports because all EU sanctions are fully compliant with obligations under international law whilst respecting human rights and fundamental freedoms.
Concerning oil sanctions, in June 2022, the European Council adopted the sixth package of sanctions that, among others, prohibits the purchase, import, or transfer of crude oil and certain petroleum products from Russia to the EU. The restrictions will apply gradually: within six months for crude oil and eight months for other refined petroleum products. A temporary exception is foreseen for imports of crude oil by pipeline into those EU member states that, due to their geographic situation, suffer from a specific dependence on Russian supplies and have no viable alternative options.
As most of the Russian oil delivered to the EU is seaborne, these restrictions will cover nearly 90% of Russian oil imports to Europe by the end of the year. This will significantly reduce Russia’s trade profits.
In addition, the EU banned the export to Russia of goods and technology in the aviation and space industry. Insurance services, maintenance services, and technical assistance related to these goods and technology are also prohibited. The United States, Canada, and the United Kingdom imposed similar restrictions.
This action means that Russian airlines cannot buy aircraft, spare parts, or equipment for their fleet, preventing maintenance repairs or technical inspections. Because as much as three-quarters of Russia’s current commercial air fleet were produced in the EU, the U.S., or Canada, over time, the ban is likely to result in grounding a significant percentage of the Russian civil aviation fleet, even for domestic flights.
Factors influencing crude O&G prices
When analyzing the O&G situation, there are four main points that need special attention including:
- Current supply and output.
- Future supply and reserves.
- Demand from major countries.
- Political events and crises.
All these factors are currently experiencing a lot of volatility.
From December 2022 to April 2023, the core winter season will hit European countries, particularly due to its international dependence on O&G. The energy system is being stressed with no excess capacity. We already see government interventions in energy markets of magnitudes not seen since World War II. For example, Germany nationalizes gas company Uniper to protect energy supplies, and Norway moves to limit electricity exports.
We might also be on the verge of a widespread industry slowing down production, mainly due to high electricity bills. For example, Volkswagen suggested high electricity bills could lead the company to relocate capacity to European nations having more LNG terminals instead of Germany, with its industry highly dependent on Russian gas.
What can we do about the current oil crisis?
Unfortunately, the current oil crisis will get worse before it gets better. However, necessity is the mother of invention. A looming oil crisis is an opportunity to cast off the old paradigm and examine new methods for minimizing oil dependence and harnessing alternative resources.
With this in mind, there are a few things to consider:
Be prepared for the crisis to worsen.
Governments might apply rations and gas restrictions, especially as we enter the colder winter months. Conserve and limit demand; consider tracking your demand and consciously reducing individual and organizational dependency.
So, what measures can be taken to reduce current oil usage? The International Energy Agency’s 10-point plan to cut oil use is a great starting point.
Look for alternatives.
Build a backup plan to mitigate future oil dependency. Last year, the Strait of Hurmuz blockage was an alarming example of how disruptions in oil shipments impact local supply. Currently, the war in Ukraine is an opportunity to reduce oil dependency. Although short-term the effects of limited oil supply will be felt far and wide, it’s a rare opportunity to develop a more sustainable future by reducing reliance on fossil fuels.
Recently, European Union lawmakers voted to allow natural gas and nuclear energy to be labeled as green investments, removing the last major barrier to potentially billions of euros of funding from environmental investors and nurturing a long-term green transition. In addition, the U.S. recently passed the Inflation Reduction Act, a $740 billion bill that includes language dedicated to combatting climate change’s effects. As the most significant U.S. investment in reducing the impacts of climate change, the legislation’s goal is to reduce carbon emissions—mostly from power generation and transportation—by at least 40% by 2030. The legislation touches all sectors of power generation, both thermal and renewable, with support for renewables and nuclear power.
Leverage tech to reduce oil consumption.
Don’t miss the opportunity to leverage tools that we already have. Currently, the oil routing process remains manual or semi-automatic. Technology can update these processes by optimizing delivery amounts, scheduling, stock levels, and average sales. In addition, assess the feasibility of digital transformation projects that streamline documentation and attestation processes to provide further fuel efficiencies.
Use the current crisis to prepare for the next one
Although we cannot predict how long the oil and gas shortage will last or what ripple effects will impact upcoming months, one thing is certain – it’s going to be a tough winter.
What is absolutely clear is that we are still not prepared to stop relying on fossil fuels without proper alternatives in place. In times of crisis, opportunities are always abundant. The pandemic triggered unprecedented mobilization in the science and innovation community. Synergies between public research agencies and private foundations are everywhere, and this needs to continue. Science and tech offer the only exit strategy for this crisis and to be better prepared to react when the next disruption knocks on the door.
Want to learn more ways to better position your business for the next major oil and gas shift? Contact us to get in touch with our consulting experts.