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  • New methods of financing that share risks between producers and investors
  • Efforts by oil companies to lower their breakeven
  • Diversification of large companies


  • High levels of debt, especially for companies exploiting non-conventional oils
  • Sharp drop in profitability due to the health crisis
  • High volatility of crude oil prices
  • Overcapacity of companies in the sector, in the oil and gas services segment
  • Strong pressure from environmental activists to reduce investments

Risk assessment

Risk Assessment

The coronavirus pandemic led to drastic containment measures that affected economic activity. Coface forecasts a 4.8% contraction in global GDP in 2020 and a 4.4% recovery in 2021, following a global economic growth of 3.2% and 2.5% in 2018 and 2019, respectively. In this context, oil prices are facing a sharp contraction in demand: the price of crude oil fell by 74% year-on-year in April 2020. Consequently, Coface has revised its crude oil growth forecasts downwards, and is anticipating a crude oil price of around USD 40 per barrel on average in 2020, with fluctuations around this value. However, this price level is too low to enable exploration companies to generate significant cash flow. This has repercussions on the entire industry, as capital expenditures are low, which destabilizes oil-related companies that are already suffering from overcapacity. These financially weakened oil-related companies are among the most at risk in the sector.

Furthermore, refineries have to deal with new standards, particularly environmental ones, while facing a contraction in demand. Refinery operations should not fully recover before 2022, with disparities depending on the geographical area. Economic recovery depends both on countries' exposure to the virus and on government responses aimed at stimulating the economy. Moreover, it is important to note that the recovery programmes are part of the governments' desire to achieve a low-carbon economy, thus promoting the development of renewable energies, an orientation already pushed before the COVID-19 crisis. Therefore, this questions the sustainability of the hydrocarbon sector, particularly in North America, where unconventional players must now demonstrate (with difficulty) that their activity is viable, while operating in a region where the energy sector has been dynamic in recent years.


Sector Economic Insights
Covid-19: a massive shock that strongly impacts an industry already weakened before the crisis

Containment measures in many countries halted industrial activity, as well as transport-based travels. The consumption of factories dropped, as they no longer produced. Moreover, the halt of international travel has drastically reduced the demand for kerosene, which, combined with lower car use, has led to a drop in fuel consumption. Consumption of plastic products in the automotive and construction industries has declined because of the drop in activity in these sectors, particularly during Q2 2020. According to the International Energy Agency (IEA), the demand for oil in 2020 will be 8.4 billion barrels per day lower on average than in 2019. On 12 April 2020, the OPEC+ countries agreed on a decrease in oil production of 10 million barrels per day from May to June 2020, in order to offset the fall in prices. Coface anticipates that in their next meeting, which is scheduled in early-December 2020 (at the time of writing of this study), the OPEC+ members should modify these provisions towards an increase of production during 2021.

The resumption of economic activity following the easing of containment measures has led to a rebound in the consumption of petroleum products. Nevertheless, according to IEA forecasts, demand is expected to remain 2.4 billion barrels per day lower on average compared to the 2019 level, mainly because of the drastic drop of activity in the aviation sector.


A difficult recovery for fossil fuels in all major markets worldwide

In Asia, the recovery has been underway since the second quarter, as China lifted its containment measures earlier than the Western economies. In China, oil demand rebounded in March and April. In the second quarter of 2020, production of Chinese refineries increased by 400 thousand barrels per day (kb/d) on average and should reach 740 kb/d in 2021, which is above the 2019 level, according to the IEA.

In Europe, uncertainty is weighing more heavily on economic activity. Indeed, containment measures were eased later and the authorities have to manage an increase in the number of new daily cases, which signals the emergence of a second wave and a strong resurgence of the pandemic in many countries. A return of drastic health measures that would penalize economic activity cannot be ruled out, which would  put the entire upstream sector (exploration-production and oil-related industries in particular) in difficulty. Thus, despite an upturn in activity in June 2020, the level of refinery activity in 2020 and 2021 will remain below 2019 levels (-1.3 mb/d and -0.6 mb/d, respectively, according to the IEA).


In the Americas, where the pandemic is not fully under control, rising unemployment and uncertainty are weighing on purchasing and investment decisions. The economic recovery in many regions should lead to a rebound in refinery activity (+2.5 mb/d in Q3 2020 compared to Q2 according to the IEA). However, due to the possible resumption of contaminations and its consequences on the confidence of agents as well as economic activity, refinery activity is not expected to return to pre-crisis levels before 2022.

Regarding liquefied natural gas (LNG), the COVID-19 crisis and the drop in demand has emphasized the problem of overcapacity that the sector has been facing for several years. Despite the crisis, Chinese demand is boosting LNG imports, which increased by 16% year-on-year in August 2020. Europe, which was the largest importer of LNG in 2019, should import less in the coming years (-20 million tonnes imported between 2020 and 2022) according to forecasts by the Australian Government’s Department of Industry, Science, Energy and Resources. This is due to stagnating gas consumption and increasing competition between pipelines. U.S. exports also fell sharply between June and August 2020 (-35% year-on-year) because of a loss of competitiveness against competitors. U.S. exports are expected to rebound in 2021 and 2022, as the effects of COVID-19 fade. 


A deterioration of financial results

The profitability of the various segments in the sector declined overall between Q1 and Q2, quarter-on-quarter. While the profitability of exploration and production companies fell in the first half of 2020 (-46% between Q1 and Q2 2020), the profitability of the other segments (Oil-related, Refining and Marketing, Pipelines) was already declining in 2019. The net debt (ratio of net debt to total assets) of large companies was stable for exploration and production companies as well as pipelines between Q2 2019 and Q2 2020, but the ratio rose sharply for oil-related companies and refineries (+21% and +19%, respectively). 

The non-conventional oil universe in the United States is particularly struggling, and is characterized by falling prices, declining revenues and investments, as well as deteriorating investor confidence. According to the Institute for Energy Economics and Financial Analysis (IEEFA), revenues in the sector fell by 64% in Q2 2020 compared to the previous quarter. In response to this decline, companies in the sector have reduced their fixed capital investments by 45%. While President Barack Obama had forced car manufacturers to reduce CO2 emissions by 5% per year, President Donald Trump lowered this level to 1.5% per year, a measure taken to promote the oil sector as a whole. Despite the deregulations that President Trump made since his election, the low demand has thwarted these granted benefits. Indeed, according to the August 2020 survey of the American law firm Haynes & Boone, the amount of total debt of companies in the oil sector has increased by 320% compared to 2019. For oil service companies, this increase is of 98%.


Renewable energies should contribute to the reconfiguration of the sector in the near future.


In accordance with the will of public opinion in a majority of countries, particularly in advanced economies, the transition to a low-carbon economy throughout the world, which is based on energy transition, is challenging the fossil fuel industry. Stimulus plans in response to the COVID-19 crisis, which incorporate environmental concerns, should accelerate the reconfiguration of the sector, which had begun before the crisis. For instance, there are new regulations in the automotive sector in the main markets (Asia, Europe, U.S.), whose players are developing models with a lower carbon footprint, as well as electric models, in order to avoid fines.

Ultimately, the drop in demand for plastic and the more systematic use of plastic recycling, thanks to changes in consumption habits and regulations (bottles marketed in the EU will have to contain at least 25% recycled plastic in 2025 and at least 30% in 2030), entails a drop in demand for refined oil (via naphtha).

While the development of renewable energies has slowed down because of the COVID-19 crisis, Coface expects the renewable energy segment to be more resilient than fossil fuels. Indeed, renewable energies have been growing in importance over the last 20 years, increasing from 21.8% of total world installed electrical capacity in 2000 to 34.7% in 2019, according to the International Renewable Energy Agency (IRENA).


Last update : October 2020

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