Italian energy major, Eni, described 2020 as a “year of war”, regarding the energy crisis experienced in the face of a global pandemic. But it may be too soon to see the issues faced last year as a thing of the past. Eni is committing to lower the price of oil at which the company breaks even going into 2021, as a means of tackling the uncertainty of the oil economy in the coming months. Francesco Gattei, CFO at Eni, stated that “Volatility is growing every year.”, highlighting the need to be prepared for the energy demand of the future.
In 2020, global fuel demand decreased by 30% on average. While demand appears to be steadily increasing as COVID-19 restrictions are relaxed, the worry is that this need may not increase to pre-pandemic levels anytime soon.
Oil giants BP Plc and Total SE published forecasts which hypothesized that oil demand was at its peak in 2019, and is therefore now in decline. This comes as the production of oil and liquid fuels at the global level peaked at 94.25 million bpd in 2020, down from 100.61 million bpd in 2019. According to the Energy Information Administration, this figure is expected to increase to just 97.42 million bpd in 2021.
2020 therefore proved the perfect time for environmentalists to campaign for a shift towards renewables; as oil demand and prices plummeted in April last year. As dozens of countries agreed to Paris Agreement objectives in December, with such promises as net-zero emissions over the next 30 years, many governments and investors have also put pressure on energy companies to develop renewable strategies.
The decrease in oil demand over the last year has already forced refineries in Asia and North America to close or curb output, particularly along the U.S. Gulf Coast as companies worry demand losses might never return.
In the USA, these closures include the largest Royal Dutch Shell refinery in Convent, Louisiana, as well as Marathon Petroleum’s refineries in Martinez, California, and Gallup, New Mexico. Japan, Singapore, The Philippines, Australia and New Zealand also all experienced refinery closures during 2020. The question is whether plants across Europe can weather the storm long enough to see a demand increase.
The international oil benchmark, Brent Crude, finally reached $50 a barrel this month, following months of volatility. However, Gattei at Eni suggests the need to drive company costs down so that the price at which they break even is lower than this, as a means of defence following such a difficult year for the industry.
As OPEC+ agree to increase production levels by 75,000 bpd in February, with Saudi Arabia voluntarily decreasing production by 1 million bpd in February and March sends prices soaring, investors must weigh up whether to continue investing in oil or move to alternatives; faced with the potential volatility in demand over the next months and uncertainty over future OPEC agreements.
While energy companies have worked hard to remain relatively stable throughout 2020, the potential impact of a low energy demand and price volatility in 2021 could be a push too far. As governments and funders encourage greater investment in renewables and there continues to be uncertainty around the oil outlook for 2021, the question is whether oil majors can survive another turbulent year.
By Felicity Bradstock for Oilprice.com