COVID-19 and OPEC+ Short term oil and liquids demand and supply scenarios - May 2020
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May 2020 DRAFT COVID-19 and OPEC+ Short term oil and liquids demand and supply scenarios
As oil and liquids markets absorb COVID-19/OPEC+, short term scenarios help
business planning
CONTEXT
• Oil markets are being severely disrupted by COVID-19 and the actions to mitigate its spread.
Magnitude and speed of demand destruction is unprecedented. OPEC+ have defined an initial plan
to constrain an oversupplied storage infrastructure and market
• Bain’s scenario approach focuses on major disruptions that can drive different industry
outcomes. In this case, short-term dynamics are being disrupted by unprecedented demand
destruction and plausible supply responses to potential storage constraints and prices
• COVID-19 has such a dramatic impact on demand that we started there and devoted our first
webinar to three demand scenarios
• Scenarios are developed in the service of answering questions critical to business planning:
Depth and length of the downturn? OPEC+ and major producer supply responses? Timing and
duration of potential storage constraints? Different pricing mechanisms during the recovery?
LON COVID-19 and OPEC+_IMCA2020 2Short term oil and liquids demand scenarios, COVID-19 impact
BAIN APPROACH
20 countries, nine sectors Five pathway archetypes Three envelope scenarios
• Observed all available data • Identified 5 pathway archetypes • Not all demand pathways are
(baseline, and COVID impact) with a different demand likely available in every country,
for the largest 20* countries destruction, trough and but countries and RoW have
(>75% of global oil demand) recovery profiles for each alternative outcomes
• Mix and impact on 9 demand • A country/market’s pathway will • Our three plausible scenarios
sectors (industry, cars, truck have a huge impact on the are based on country fit to
freight, air freight, passenger shape and size of demand pathways and link to Bain’s
flights, ship, rail, buildings, and destruction, focus on 2020 and **Marco Trends Group Covid-
non-energy) by country, RoW into 2021 19 economic outcomes,
*US, China, India, Japan, Saudi Arabia, Russia, Brazil, South Korea, Canada, Germany, Iran, Mexico, Indonesia, UK, France, Thailand, Singapore, Spain, Italy, Australia
** Bain Marco Trends Group https://www.bain.com/insights/topics/coronavirus/
LON COVID-19 and OPEC+_IMCA2020 3Start point: Archetype pathways with A to F areas of material uncertainty
ARCHETYPE PAT H W AY S I L L U S T R AT I V E
Oil & Liquids demand (indexed to 100) Total months
Period of demand to reach
A
decline trough
E
% Mbpd from
F Aggregate drop in
B pre-virus
B demand vs. baseline normal
Total months
C Period of trough in trough
Total months
D Period of recovery to reach new
A C D normal
Total % Mbpd
E Stabilization level vs.
from baseline
Oil baseline after recovery
demand Trough Recovery Stabilization New growth
decline F Stable growth rate rate compared
vs. baseline to baseline
Months
LON COVID-19 and OPEC+_IMCA2020 4Bain global oil and liquids demand scenarios developed from market/country
pathways describe a ~9 to 20% aggregate demand reduction vs. the 2020 baseline
GLOBAL DEMAND SCENARIOS PRELIMINARY
Global oil and liquids scenarios 2020 full year demand vs. baseline What you would have to believe
101.2 Mbpd • ‘Faster recovery’: US, India, China
2020 (baseline) effectively contain the virus (pathway 2);
oil demand recovers by end of Q2. Major
European economies delay containment
(pathway 3), but recover by end of 2020.
• ‘Moderate recovery’: China effectively
contains spread (pathway 2); developed
economies (US, Europe) need longer-
~(9) Mbpd run partial lockdowns to recover by end
of 2020 (pathway 3); emerging markets
struggle into 2021 (pathway 4)
~(13) Mbpd
~(20) Mbpd
• ‘Slower recovery’: virus reemerges in
China (pathway 4) and continued spread
in developed markets leads to deeper
“Faster recovery” “Moderate recovery” “Slower recovery” economic impact into 2021 (pathway 4).
Some emerging markets institute long-
run lockdowns but ultimately are forced
to let the virus run its course (pathway 5)
Note: 2020 baseline based on 2017 and 2018 growth projections
LON COVID-19 and OPEC+_IMCA2020 5Oil and liquids demand decline by end use segment and scenario
PAT H W AY OUTCOMES I L L U S T R AT I V E
Insights
• ‘Faster Recovery’: deep
15-20% trough of total
demand, recovery
relatively swift and global
demand is almost back
to baseline by Q4 2020,
except aviation
• ‘Moderate Recovery’:
presents the industry
with a severe and longer
trough of over 20% lower
demand and sluggish
recovery into 2021
• ‘Slower Recovery’: slow
recovery with quasi-
command economy
“Faster “Moderate “Slower structure and 25-30%
recovery” recovery” recovery” GDP destruction
LON COVID-19 and OPEC+_IMCA2020 6Reading the future demand signposts will give a directional sense of direction, inform
choices and (potentially) trigger the re-definition of a new set of scenarios
DEMAND SIGNPOSTS SIGNPOSTS NOT EXHAUSTIVE
Signposts… …can be read at trigger points over time… …to indicate direction
Scenarios with more
Public response, e.g. Months
better-case themes
SIMPLIFIED Faster
bans on travel, movement, Flight miles and
passenger car recovery
social behavior changes Weeks
miles “bounce”
Hospitalization
rate decreasing
Days
Nationwide
Virus reaction, e.g. Today lockdowns
hospitalization rates, Continued Moderate
growth, but Employers begin Future
new hot spots, slower re-hiring at scale Recovery
Weaker gov’t
new effective treatments response or
compliance
Continued
exponential
Economic impact, e.g. spread Continued Slower
unemployment, GDP, furloughs
recovery
actual sector demand Scenarios with more
worse-case themes
Good strategy under uncertainty allows a company to move faster than others based on reading the signposts
LON COVID-19 and OPEC+_IMCA2020 7Demand side observations
O B S E RVAT I O N S
• Develop bespoke scenarios solving for the market outcomes that matter most to you
– Aim to understand the plausible range of what could happen – not a point specific “planning case”
– Define signposts and leading indicators to track speed and direction of macro- microeconomic evolution
– Set trigger points to facilitate rapid and thoughtful response to unfolding events
• Consider how all signposts and trigger points should influence all aspects of your business
– It’s about strategic moves, investments, and cost reductions
– and stakeholder & investor communication plans, human capital crisis response plans, and the rest
• Plan now / act now. Start thinking about how “temporary” ways of working and reactive cost cuts could
translate into permanent, structural improvements in efficiency and effectiveness.
– Right size the organization; prepare for “new normal” at a market and end use segment level
• Prioritize your portfolio (assets / business lines / geographies) ruthlessly – build around positions of
(potential) leadership economics
– Focus M&A / divestitures to concentrate scale where scale matters most (not just to consolidate)
LON COVID-19 and OPEC+_IMCA2020 8Depending on demand shock severity, we expect the sustainable recovery window
between Q2 2020 most optimistic, and Q4 2021 in the most negative
I N T E G R AT E D DEMAND AND S U P P LY S C E N AR I O S
“Faster recovery” “Moderate recovery” “Slower recovery”
Demand Supply
Supply
Demand
• Global storage capacity holds, just… • Will likely hit global storage capacity in • Will likely hit global storage capacity in
~3 months ~2 months
• Supply drawdown, returns and new
additions required as of Q3 2020 • Supply additions required in Q1 2021 • Supply additions not required until late
Q3 / Q4 2021
Protracted demand loss, insufficient
Deeper and longer shock, storage
Short-term, severe but disciplined and unmanaged supply constraints
constraints hit, drive need for greater
correction, risk of accelerating too fast drive fragmented reactions and
action and significant shut-ins
widespread shut-ins
Source: Rystad; Bain
LON COVID-19 and OPEC+_IMCA2020 9Weaker oil price through the crisis, but planning cases vary significantly by scenario
OIL PRICE PLANNING I M P L I C AT I O N S
“Faster recovery” “Moderate recovery” “Slower recovery”
Short-run Short-run
marginal cost marginal cost
Short-run Half-cycle cost curve ($10-25/bbl) ($10-25/bbl)
marginal cost (~$35-45/bbl)
($10-25/bbl) Shut-ins
Half-cycle
($10-15/bbl)
cost curve
(~$35-45/bbl) Shut-ins ($10-15/bbl)
• Overall, price and market mechanisms • Traditional market mechanisms begin • Global benchmark prices generally
based on cost curves are still at work to break down in order to force shut-ins lose relevance as production decisions
mainly driven by non-economic factors
• While storage is building (to Q3), short- • Shut-in economics are complicated,
run marginal cost (production OpEx) and highly asset/operator specific • Lack of storage capacity induces shut-
sets the pricing band ins earlier, with more price pressure
• Severe pricing impact will vary locally to earlier
• Once additional production is needed induce mass shut-ins; netback prices
(Q3), and the half-cycle cost curve (to break connection to benchmarks • Protracted demand loss, with reversals
induce new drilling) takes over… of shut-ins able to supply all incremental
• New drilling likely in Q1/Q2 of 2021, production until at least late 2021
• …but the pricing build will be slow, but prices and activity held down by
held back by storage draw & OPEC+ shut-in reversals, storage draw, OPEC+ • Significant structural damage to assets,
Note: Price bands are based on Brent oil price and adjust for regional differences in Brent
balance sheets, fiscal regimes
Source: Macrotrends, Rystad, Bain
LON COVID-19 and OPEC+_IMCA2020 10Integrated demand/supply scenario impacts on production capacities: US / Canadian
production likely hit hardest in slower recovery scenarios
I N T E G R AT E D S U P P LY S C E N AR I O S DIRECTIONAL
Production cuts – impact by player / oil type / country Insights
• OPEC+ cuts account for roughly
6M bpd, on average, in each
recovery”
“Slower
scenario. Additional cuts required
with Moderate to Slower recovery.
Legend • Storage capacity provides an outlet
Players: for excess oil supply, but likely not
“Moderate
sufficient to avoid further shut-ins
recovery”
NOC Other
IOC
Oil types:
• Moderate to Slower recovery, the US
and Canada (with non-OPEC
DW Onshore (conv)
countries) likely to see significant
Offshore Shale
shut-ins.
recovery”
Oil sands
“Faster
Country:
• IOCs, independents increasingly
OPEC+ US / Canada
impacted in tough scenarios.
Other
Balance sheet and local demand
factors will be a differentiator in an
intensely competitive landscape.
Source: OPEC, Rystad Energy, Bain Analysis
LON COVID-19 and OPEC+_IMCA2020 11Oil & liquids scenarios, key questions and implications for the industry
Q&A
Return as soon as mid Q3 2020 or as late as Q4
• How long and deep do we expect the 2021, signposts indicate we are closer to
downturn to last and when do we scenario 2 would imply mid Q1 2021 from a Q2
return to a “new normal”? 2020 -20Mbpd trough
• Who is exposed to potential supply Scenario 1 OPEC+ cut foundation, increased cuts
reductions? What are impacts on the required across the industry moving to 2 and 3.
price setting mechanism? Price follows but in 3 local economics overwhelm
Local segment demand will be the key indicator
• What are the right signposts to for oil and liquids demand fall and recovery,
navigate by in the midst of uncertainty? transport and especially car/trucks
If the industry can remain in bounds of 1 and a
• How to anticipate lasting structural managed 2, basic industry structure, economics,
changes to demand, supply and price? price mechanisms can hold, in scenario 3
anticipate / plan for radical change
LON COVID-19 and OPEC+_IMCA2020 12For further information please contact: • Peter.Parry@Bain.com Partner, Head Global Oil & Gas Consulting, Milan • Jorge.Leis@Bain.com Advisory Partner, Global Oil & Gas Practice, Houston • Michael.Short@Bain.com Partner, Global Oil & Gas Practice, Houston • Dave.Rennard@Bain.com Principal, Global Oil & Gas Practice, London
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