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QuickHit: 2 Things Oil & Gas Companies Need to Do Right Now to Win Post Pandemic

This week’s QuickHit, Tony Nash speaks with Geoffrey Cann, a digital transformation expert for oil & gas companies, about what he considers as “the worst downturn” for the industry. What should these companies do in a time like this to emerge as a winner?

 

Watch the previous QuickHit episode on how healthy are banks in this COVID-19 era with Dave Mayo, CEO and Founder of FedFis.

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

Show Notes

TN: Hi, everybody. This is Tony Nash with Complete Intelligence. This is one of our QuickHits, which is a quick 5-minute discussion about a very timely topic.

 

Today we’re sitting with Geoffrey Cann. Geoffrey Cann is a Canadian author and oil industry expert and talks about technology and the oil and gas sector.

 

So Geoffrey, thanks so much for being with us today. Do you mind just taking 30 seconds and letting us know a little bit more about you?

 

GC: Oh, sure. Thank you so much, Tony, and thank you for inviting me to join your QuickHit program.

 

So my background, I was a partner with Deloitte in the management consulting area for the better part of 20 years, 30 years altogether. I had an early career with Imperial Oil and I’ve spent most of my career helping oil and gas companies when they face critical challenges.

 

These days, the challenge I was focusing on prior to the pandemic was the adoption of digital innovation into oil and gas because the industry does lag in this adoption curve and yet the technology offers tremendous potential to the sector. I see my mission, and it still doesn’t change just because of the pandemic, as the adoption of digital innovations to assist the industry and to resolve some of its most intractable problems. That’s what I do.

 

 

TN: Wow. Sounds impressive. I’m looking at the downturn in oil and gas and the downturn in prices. There have been big layoffs and cost savings efforts and these sorts of things with oil and gas firms. And, typically, a pullback is an opportunity for the industry to re-evaluate itself and try to figure out the way ahead. Are we there with oil and gas? Do we expect major changes, and as we emerge from the current pullback, how do we expect oil and gas to emerge? We expect more technology to be there. Do we expect more efficiency in productivity? Are there other changes that we expect as we come out of this?

 

 

GC: I’m pessimistic about the prospects for oil and gas and it’s driven by this collapse and available capital and cash flow to the industry.

 

When the industry hits this kind of survival mode, there’s a standard playbook that you dust off. And that playbook includes trimming your capital, canceling projects, downsizing staff, closing facilities, squeezing the supply chain, trimming the dividend. Anything that is considered an investment in the future is put on hold until the industry can get back on its feet.

 

And this is the worst downturn. I’ve lived through six of these. This is the worst I’ve seen.

 

Certainly sharpest, fastest, and deepest and coupled it with the over excess production in the industry. When the industry comes out of the other end of the pandemic, what we’re going to see the industry do is devote its capital to putting its feet back on the ground and getting back into its normal rhythm. But what that means is all the changes that our potential out there are likely to have been set aside in the interim.

 

 

TN: If you were to have your way, and if you were running all the oil companies, and they were to make some changes in this time, what would those changes be? What would some of those key changes be?

 

 

GC: There is a gap between what other industries have discovered, learned, and are adopting, and where oil and gas is at. That gap is, first, needs to be addressed by raising the understanding and the capability and the capacity in oil and gas to deal with the possibilities presented by these technologies. And so there’s task number one that oil and gas companies can absolutely do even during a downturn. Just train people and get them across the newer concepts or newer ideas.

 

A second possibility is to embrace the foundational elements that have proven to be the key success factor for so many other industries. One of those would be cloud computing. The adoption of cloud-based infrastructure, moving data into the cloud, is not costly, it generates an immediate payback because cloud infrastructure is so cheap, and it puts the company into a solid position for when the normal day-to-day running of it gets back in gear, the investments it may have been making an in digital innovation can all now be brought back into stride because this foundational technology will be in place.

 

So those are the two things that I would do: Get people ready for the journey ahead and put one of these foundational steps in place to get ready.

 

 

TN: Those are really enabling technologies, right? They’re not substitutional. They still need people, they still need engineering skills. It’s really just enabling them to do more, right?

 

 

GC: Correct, yeah. And covering off that gap incapacity is the key thing. Somewhere down the road, there will be the adoption of artificial intelligence and machine learning tools to improve the performance of the business. Those are coming and they’re coming very quickly. We’re not there yet. The job is where the industry needs to move forward, and as I see those are the two steps.

 

 

TN: Do you see this as kind of a generational thing? Is this five-ten years away? Or is it an iterative thing where you see it changing bit by bit for each year? How do you see this on the technology side for them?

 

 

GC: Well, in my book, I actually sketched out a way to think about this problem. And I call it the fuse in the bang. The fuses, if you think about Bugs Bunny cartoons. Bugs Bunny and it would be a comically large keg of gunpowder. It’ll be jammed into the back of your Yosemite Sam. As they go racing off, they leave a trail of gunpowder and Bugs would just drop a match in it. It always ended in a comically large but not very terminal explosion. So imagine that the length of fuse, that trail of gunpowder is how much time we’ve got and the size of the keg of gunpowder is how big the impact is going to be. In my book, I could actually go through some ways to think about this.

 

But you have to think about it in these terms, oil and gas is principally a brownfield operations business. In other words, most of the assets predate the Internet Age and they’re continuing to run and they run 24/7, they’re extremely hard to change, and so as a result, the idea that we can quickly jam innovation into these plants is just nonsense. It’s not going to work. So it’s going to take quite a long time.

 

The generation is on two fronts. One is the technology is legacy and therefore it has generational barriers to adoption of change. We also have a workforce, which is tightly coupled to that infrastructure and it also has struggles to cope with change. So we have to come across these two generational shifts that have to happen and they basically have to happen at the same time.

 

 

TN: Very interesting. Geoffrey, I wish we could go on for another hour. There’s so many directions we can take from here. So, thanks much for your time. It’s been really great talking to you and I hope we can revisit this maybe in a couple of months to see where the industry is, how far we’ve come along, just with the downturn of first and second quarter, look later in the year just to see where things are and if we’re in a bit of a better place.

 

 

GC: It’d be great fun because this is, you know, as I’d like to tell people, this is not the time to actually leave or ignore the industry. It’s when it goes through these great troughs like this, this is where exciting things happen, so pay attention.

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Oil prices could plunge below $20 a barrel this quarter as demand craters: CNBC survey

The oil prices article below is originally published by CNBC, where our CEO and founder Tony Nash was quoted. 

 

The oil price bust may not be over.

 

A historic demand shock sparked by the coronavirus pandemic is set to worsen in the current quarter, undermining any coordinated effort by heavyweight producers Saudi Arabia, Russia and the United States to cut supply aggressively and rebalance the market, according to a CNBC survey of 30 strategists, analysts and traders.

 

Episodic spikes of $20 a barrel or more in benchmark crude oil futures of the type seen last week cannot be ruled out as rivals Saudi Arabia and Russia attempt to reverse a damaging battle for market share and engineer a global supply deal which could cut up to 15 million barrels a day, the equivalent of about 10% of global supply.

 

But such price rallies are unlikely to last, according to the findings of the CNBC survey conducted over the past two weeks.

 

Brent crude futures, the barometer for 70% of globally trade oil, are likely to average $20 a barrel in the current quarter, according to the median forecast of 30 strategists, analysts and traders who responded to a CNBC survey, or 12 out of 30 respondents.

 

However, nearly a third, or nine of those surveyed, said prices may drop below $20 a barrel this quarter.

 

Amongst the more pessimistic projections, ANZ’s Daniel Hynes saw the risk of prices in the ‘mid-teens’ while JBC Energy’s Johannes Benigni warned that both Brent and US crude futures could ‘temporarily’ fall to around $10 a barrel.

 

 

New normal

 

The Organization of Petroleum Exporting Countries (OPEC), the supplier of a third of the world’s oil, and its rivals outside the group are “of pretty limited relevance in this context, as they are neither likely to be willing nor able to stem the current demand shock,” Benigni said.

 

Bearish forecasters said two forces would keep oil prices depressed in the second quarter — skepticism that Saudi Arabia and Russia would relent in their price war and commit to the deepest cuts in the producer group’s history (with or without participation from U.S. shale producers) and a glut in the current quarter caused by a monumental collapse in global demand as the full economic severity of the global coronavirus pandemic unfolds.

 

“A demand drop of 10% is the New Normal with oil,” said John Driscoll, director of JTD Energy Services in Singapore and a former oil trader whose career spans nearly 40 years.

 

Global commodities trader Trafigura’s chief economist Saad Rahim offered a starker prediction. Oil demand could fall by more than 30 million barrels a day in April, or around a third of the world’s daily oil consumption, Reuters reported on March 31, citing his forecasts.

 

And even if Saudi Arabia, its OPEC allies and major producers outside the group such as Russia and the U.S. did agree on aggressive supply restraint, it’s unlikely to materially drain global inventories that are closing in on what the oil industry calls ‘tank tops’, or storage capacity limits.

 

 

Too little, too late

 

“The long and short of it is that the current rally will likely be short lived,” Citigroup’s oil strategists led by Ed Morse said in an April 2 report.

 

“The big three oil producers may have found a way to work together to balance markets, but it looks like it is too little too late. That means prices would have to fall to the single digits to facilitate inventory fill and shut in production.”

 

Fatih Birol, executive director of the International Energy Agency said oil inventories would still rise by 15 million barrels a day in the second quarter even with output cuts of 10 million barrels a day, Reuters reported on April 3.

 

Citi expects Brent to average $17 a barrel in the current quarter and warned Moscow, Riyadh and Washington “cannot in the end stop prices from possibly falling below $10 before the end of April.”

 

Plus, travel restrictions, border closures, lockdowns and economic disruption caused by ‘social distancing’ and other measures taken by governments globally to slow the spread of the virus will exact a heavy toll on oil demand and could even linger when the virus clears, clouding the prospects of a recovery.

 

“As for the second quarter or even the third, I don’t see a V-shaped recovery for prices,” said Anthony Grisanti, founder and president of GRZ Energy, who has over 30 years of experience in the futures industry.

 

“The longer people are shut in the more likely behaviour will change…I have a hard time seeing oil above $30-35 a barrel over the next 6 months.”

 

 

Negative pricing

 

Standard Chartered oil analysts Paul Horsnell and Emily Ashford said they expect “an element of persistent demand loss that will continue after the virus has passed, driven by permanent changes in air travel behavior and the demand implications of businesses unable to recover from the initial shock.”

 

With demand at near-paralysis, oil and fuel tanks from Singapore to the Caribbean are close to brimming – stark evidence of the global glut.

 

Global oil storage is “rapidly filling – exceeding 70% and approaching operating max,” said Steve Puckett, executive chairman of TRI-ZEN International, an energy consultancy.

 

Citi’s oil analysis team and JBC Energy’s Johannes Benigni even warned of the risk of oil prices turning negative if benchmarks drop below zero, effectively meaning producers pay buyers to take the oil off their hands because they’ve run out of storage space.

 

“Theoretically, the unprecedented stock-build might mean negative oil prices in places, should the world or some regions run out of storage and if higher-cost production is stickier than thought,” Citi analysts said.

 

Despite the bearish consensus, nine survey respondents held a more constructive view. Within that group, six forecasters expected Brent crude prices to stabilize around the mid-to-late twenties in the second quarter while one called for $30 a barrel.

 

Tony Nash, founder and chief economist at analytics firm Complete Intelligence, and independent energy economist Anas Alhajji topped the range at $42- and $44 a barrel, respectively.

 

U.S. shale producers, who need $50 to $55 a barrel crude oil to just break-even, are struggling to maintain operations in a depressed price environment. That’s led to cutbacks in production and capital spending, job losses and bankruptcies across the U.S. shale industry and globally.

 

The oil market is underestimating such a shake out and its future impact on rebalancing the global oversupply, Alhajji said.

 

“Shut-ins are already taking place. Companies made major spending cuts and many will cut again.”

 

Markets are also downplaying the extent of the post-virus rebound on oil demand, Alhajji and Nash claimed, though determining the endpoint to the pandemic is near-impossible.

 

“We expect initial excitement over demand in May as the West comes back online, then it falls slightly as expectations are moderated going into June,” Complete Intelligence’s Nash said.

 

This article originally appeared in CNBC at https://www.cnbc.com/2020/04/06/oil-prices-could-plunge-below-20-a-barrel-in-q2-as-demand-craters-cnbc-survey.html

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Podcasts

Could COVID-19 Finally Kill the EU?

The fallout from COVID-19 might result in the disintegration of the European Union while the flight to safe havens like the USD is yet another headache for the financial markets to stomach, according to Tony Nash, CEO of Complete Intelligence.

Produced by: Michael Gong

Presented by: Roshan Kanesan, Noelle Lim, Khoo Hsu Chuang

 

Listen to the podcast in BFM: The Business Station

 

Show Notes:

 

BFM: So for more on global markets right now, we speak to Tony Nash, CEO of Complete Intelligence. Welcome to the show, Tony. Now U.S. markets closed down sharply again last night, erasing all gains from the time President Trump was elected. So what’s your outlook for markets? Is it still too early to buy?

 

TN: Gosh I don’t know. Actually, we don’t really know if it’s a really good time to buy. At this point, it’s really hard to catch that kind of falling knife. But what we don’t see is a V-shaped recovery. We think we’re in the zone where the fall may start slowing down. But we believe the equity markets will trade in a pretty low range for the next couple of months. And that’s because we’re not really sure of the economic impact of the slowdown in the West.

 

This COVID-19 is a government-driven recession that countries have lawfully gone into. So a lot of the recovery has been how quickly the fiscal stimulus is put into the hands of consumers and companies, and how quickly those individuals will get back to work.

 

 

BFM: Well, oil continues to fall last night to record lows with the Brent at $26 per barrel. What’s your view on oil? I know you are seeing the stock market. We do not know where the bottom is. But for oil, are we hitting the bottom yet?

 

TN: We may not be, but we’re pretty close. Our view is that crude will bounce once the Saudi-Russia price standoff is resolved. So we actually see crude moving back into the 40s in April.

 

But after that, we expect a gradual fall back into the low 40s to the high 30s in May. So, you know, we’ll see the next several months’ prices will be depressed. And we think it’s going to be quite a while before we see oil at 50 bucks again.

 

 

BFM: Yeah, Tony, you would have seen the stock futures point in green, obviously quite buoyed by the ECB’s whatever-it-takes policy. In Asia this week, four central banks are meeting. I’d like to go off a piece of possible talk about Australia, Thailand, Philippines, Indonesia. Our central banks are expected to meet this week. What do you expect them to do in terms of responding to the market turmoil?

 

TN: So it can’t just be central banks. I think central banks will do whatever it takes. But you really have to get finance ministries involved because, again, this is a government-induced recession.

 

Governments have demanded that people stay at home due to COVID-19. They’ve demanded that places of business close. And so until finance ministries and treasury departments get involved to get money in the hands of consumers and companies, we’re in a pretty rough place and there’s a lot of uncertainty.

 

So I think the central bank activity is fine. But I think getting a fiscal stimulus out there right now and not waiting is what they need to do. The US is talking about doing something in mid-April, that is just not good enough.

 

We have to get fiscal stimulus out right now because the governments have brought this on. The markets did not bring this on. The governments brought this recession on.

 

 

BFM: Yeah, Tony, obviously the helicopter money is going beyond the conceptual stage right now. But from a fiscal standpoint, how many central banks in Asia can afford, you know, the financial headroom to pay these helicopter money solutions?

 

TN: Well, whether they can afford it and whether they need to afford it are two different questions. And so I think we have real issues with a very expensive U.S. dollar right now.

 

Dollar strength continues to pound emerging market currencies. And emerging markets and middle-income markets may have to print money in order to get funds in the hands of consumers and companies.

 

So I think you have a dollar where appreciation continues to force the dollar strength. And you also have middle income and emerging market countries who may have to turn on printing presses to get money into the hands of consumers. So I think for middle income and emerging markets, it’s a really tough situation right now. The dollar, I think, is both a blessing and a curse for the U.S. But the U.S. Treasury and the Fed have to work very hard to produce the strength of the dollar.

 

There is a global shortage of dollars, partly because it’s a safety currency, partly because of the debt that’s been accumulated in U.S. dollars outside of the U.S.. And if those two things could be alleviated, it would weaken the dollar a bit. But the Treasury and the Fed are going to have to take some drastic measures to weaken the dollar.

 

 

BFM: Well, how much higher do you think the green buck can go?

 

TN: It can be pretty high. I mean, look, it depends on how panicked people get. And it depends on how drastic, I’d say, money supply creation is in other markets.

 

I think there are real questions in my mind about an environment like this and around the viability of the euro. The EU is in a very difficult place. I’m not convinced that they can control the outbreak. I think they have a very difficult demographic position. And I don’t think Europe within the EU, have the fiscal ability to stimulate like it is needed. The ECB cannot with monetary policy, wave a magic wand and stimulate Europe.

 

There has to be fiscal policy, and the individual finance ministries in every single EU country cannot coordinate to the point needed to get money into the hands of companies and individuals. So I think Europe and Japan, actually, have the most difficult times, but Europe has, the toughest hole to get out of economically.

 

 

BFM: It really sounds like Europe has its work cut out for it at this point. What do you think? What could we see coming out of Europe in terms of any fiscal policy? Or will this pressure the EU, put more pressure on the EU?

 

TN: ECB doesn’t really have the mandate for fiscal policy, so they would have to be granted special powers to develop fiscal policy solutions. It has to be national finance ministries in Europe that develops that.

 

So the ECB can backup as many dump trucks as it wants, but it just doesn’t have the power for fiscal policy. So, again, our view is that there is a possibility that the Euro and the EU actually break up in the wake of COVID-19.

 

This is not getting enough attention. But the institutional weakness in Europe and the weakness of the banking sector in Europe is a massive problem and nobody is really paying attention to it.

 

 

BFM: Do you think this has been a long time coming?

 

TN: Oh, yeah. I mean, look, we’re paying for the sins of the last 20 years right now. And for Asia, you know, Asian countries and Asian consumers and companies have taken on a huge amount of debt over the past 20 years to fund the quote unquote, “Asian Century.” And I think a lot of Asian governments and countries will be paying the price over the next six months. The same is true in Europe. But the institutions there are very, very weak.

 

The U.S., of course, has similar problems, not because the U.S. dollar is so dominant, the U.S. can paper over some of those sins, although those problems are coming from the U.S. as well.

 

So, again, what we need to think about is this: The people who are the most affected by COVID-19 are older people. Those people are no longer in the workforce generally, and they’re no longer large consumers, generally.

 

OK. So all of the workforce is being sidelined or has been sidelined in Asia, is being sidelined in the West now, and consumption is being delayed for a portion of the population that is no longer consuming and is no longer working.

 

And so getting the fiscal stimulus out is important because those people who are contributing to the economy can’t do anything, right?

 

So and this isn’t to say we’re not caring about the older populations. Of course, we all are. But it’s a little bit awkward that the beneficiaries of this economic displacement are largely people who are not contributing to economies anymore.

 

 

BFM: All right. Tony, thank you so much for joining us on the line this morning. That was Tony Nash, CEO of Complete Intelligence.

 

Listen to the podcast on COVID-19 in BFM: The Business Station

 

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Podcasts

Policy Action Kicks In As Bull Market Officially Ends

Various central banks are implementing emergency rate cuts to respond to the coronavirus and as the bull market ends. Meanwhile, it remains to be seen whether peak infections in China and South Korea are a light at the end of the tunnel.

 

Presented by: Wong Shou Ning, Lyn Mak, Julian Ng

 

 

The UK has launched a stimulus plan. Do you think the ECB will be pressured to do the same?

 

I’m sure they will. I don’t think they have that much power into interest rate cutting area – the rates are already right around zero. What they’ll most likely do: buy more government bonds, ease up on the reserve ratio, loan incentives, etc.

 

Europe is in a pretty bad position partly because COVID really attacks older people more aggressively than younger people, and the demographic profile of Europe is pretty terrible. So the ECB has to do something to help the economy. What they’re trying to do is to make sure the consumers don’t totally close their wallets and the banks don’t totally close lending. They’re really trying to stimulate banks to keep money moving.

 

 

In China and South Korea, there are indications that the infections have peaked. Pres. Xi visited Wuhan. Is this the light at the end of the tunnel?

 

I think it’s a natural progression and it’s quite possible that things are dissipating in China and things are improving. We see road traffic congestion gradually building back. That’s good for everybody. 2/3 recovered. We’re getting there. There may still be quite a lot of bounce back in March. Hopefully, in Q2, we’re back to an almost normal level.

 

 

Japan’s economy seems to be bordering on the recession. Do you think even the Bank of Japan has assisted on the current downward cycle? Have they got any more policy options left?

 

Central banks can do for the ending bull market. The BOJ really has been focused since 2012 on Abenomics to try to raise the inflation rate to 2%. They never achieved that. But they have helped some other things to stimulate the economy.

 

Japan’s in a very tough place because it’s tied to the Northeast Asian supply chain and it has the same demographic problem that Europe has. They really need to start circulating money. They can use these tools on reserve rates and loans, but how much further can they push it?

 

 

The fall in crude prices has also negatively affected shale oil producers. What’s your near and long-term outlook for the industry?

 

Shale for the US is energy security. Americans are tired of the political issues that they face in the Middle East to secure their energy supply chain. The current administration help the shale producers to survive including backing up their loans, working with banks to extend the payback period, etc. Shale is seen as a national asset by the current administration as they work very hard to make sure that those companies continue to be competitive and have the resources.

 

 

Listen to this podcast on the bull market at BFM: The Business Station.

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News Articles

6% The Best China Can Do

As markets overnight were bolstered by concerns over a virus spreading from China, we speak to Tony Nash, CEO of Complete Intelligence, for his insight into the downgrade of China’s GDP forecast, the upside to US equities, and a fall in oil prices as a result of China’s coronavirus.

 

Presented by: Roshan Kanesan, Wong Shou Ning, Lyn Mak

 

Listen to the podcast from BFM: The Business Station.