After the oil price plunge of 2014-2016, the oil and gas industry were having to rethink the way it worked. The 2014-2016 collapse in oil prices came as a shock and strained the industry in the form of company cost-cutting, government austerity measures and shifts in asset preferences. The production by the E&P companies was already running dry before it was faced with a new opposition- COVID-19.
COVID-19 unleased a new set of challenges for the E&P sector. FY20 was a difficult year as the demand for fuel remained low due to the restrictions put in place keeping in mind the pandemic. This created hurdles for the E&P companies as the refineries refused crude oil intake due to low storage. Though, production decline with field maturing is a natural phenomenon but the efforts to mitigate this decline haven’t helped either as the number and sizes of the recent discoveries aren’t enough to replace these major fields.
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2020 had been a tough financial year for the oil and gas exploration sector as the economic activities around the globe came to a halt owing to the lockdowns. Due to oversupply and low demand, the companies were forced to trade in the red. Overall, in FY20, the production of oil declined by 14% year-on-year while gas production fell by 8% year-on-year. Apart from the oil prices hitting an all time low in FY20, the year was full of uncertainties and very few companies are likely to emerge unscathed from the pandemic blow.
Adapting to the New Normal
Though COVID-19 has forced E&P companies and host countries to adapt to the new normal, unfortunately not all would be able to do so. However, some resource holders are in a better position than others to adjust due to policy choices and structural factors. The worst hit by the pandemic would be the oil dependents who are already in a poor shape. The economies of these established producers rely on oil for over 20% of exports and unfortunately, the oil and gas sector are a first port of call to support political systems and economic strategies.
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In Pakistan, the exploration costs declined during the year due to the Pakistan Petroleum Limited being uninvolved in the exploratory activities as the company faced a cash crisis. Owing to the uncertainties, the prices have also remained volatile throughout. The currency devaluation in 1QFY21 has also contributed to the low profitability of the sector. Moreover, the companies are facing a financial crunch because of circular debts which has affected the drilling activities in the country. These circular debts keep adding to the receivables which ultimately leads to a decrease in the dividend paying capacity of these firms.
Pakistan’s Position in the E&P Sector
One the other hand, Mari Petroleum Company Limited (MARI) has come out as a clear winner as it depicted the highest increase in its earning. Pakistan is blessed with a great deal of hydrocarbon potential, most of which still remains untapped. Ministry of Energy, Petroleum division is especially eager to attract foreign investment with the aim to kickstart exploration activities to maximize indigenous production of oil and gas. Apart from MARI, Pakistan Petroleum Limited (PPL) and Oil and Gas Development Company Limited (OGDCL) are two public sector companies involved in exploration of oil and gas in Pakistan. These companies contribute to a major share of oil and gas production. Therefore, the Ministry of Energy has encouraged them to enter into joint-ventures with other foreign E&P companies.
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The Future of the E&P Sector
The sector’s general performance on the stock exchange over the years, however, hasn’t been the best either as the growth in the earnings have either been derived from exchange gains or high oil prices. The current scenario is completely opposite to what a research note by Alfalah CLSA described as the safe bet. This included the sector benefitting from reasonable returns backed by strong cash flows, comparatively stable oil prices and an increasing production. None of which is the case now as currently, the E&P companies are trading at a 50% discount.
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A still historic level of crude oil stocks indicates how things have been for the E&P sector this year, however, COVID-19’s vaccine rollout is expected to lift global fuel demand. Moreover, 20 new oil and gas exploration blocks are supposed to be auctioned in the near future by the government as a part of its self-reliance strategy. But the fact that producing countries would come under immense pressure to make adjustments to their demanding investment environments, in order to capture business from the diminished E&P pool isn’t going to change.