After nearly two months of crippling crisis, how will the Oil & Gas Industry recover, and when? These are the questions at the forefront of everyone’s mind. As a Mineral Management & Consulting firm, we’re analyzing the data, watching the market and advising our clients. Here are the variables that support our thinking and what we see for mineral owners.
WHEN WILL OIL & GAS PRICES RETURN TO NORMAL?
It’s the question on everyone’s mind. While we can’t give you a date, we will share what US Big Oil is doing and what we’re watching as leading indicators. US Travel and Manufacturing sectors are a significant factor but we also need to see the virus and general market stabilize for Oil and Gas to recover. We need some of the demand to return. Healing also needs global cooperation on the supply side of the economic equation. The historic price plummet into the negatives was due to more than just Coronavirus’s crippling effect on key industries. OPEC nations flooded the market in an act of desperation. We are just now starting to see some of the promised cuts taking effect.
WHY DID PRICES HIT A HISTORICAL, NEGATIVE PRICING LOW?
Saudi Arabia flooded the market and started a price war with Russia. Why? Total profit equals Quantity X Profit Margin, so Saudi Arabia responded with max production to offset the margin decline.
It can be argued that Saudi Arabia is entering its final generation of oil and gas prominence. The kingdom claims to have 270 billion barrels in oil reserves. If they continue producing at the same rate as the past decade, their resources are depleted in 72-75 years.
Given that oil accounts for approximately half of Saudi Arabia’s GDP and 16% of the world’s oil supply currently, we expect them to continue to act aggressively. They simply don’t have a future market to protect.
WHERE’S THE US ENERGY SECTOR MOVING?
The US political system exudes significant power for the Energy Industry. Because we’re in an election year, November 3 will be monumental. Will the next President of the United States be pro-industry or not? Don’t expect to see any major investments, pivots or swings until the next US President is announced.
However, major oil and gas companies are simply sitting this one out. Every crisis offers opportunity. Before Coronavirus really took hold in the US many companies were doing big projects and making announcements, like, BP announced its plans to be Net Zero Emissions by 2050. Now it is being said that the Oil and Gas industry has stepped back ten years. That will sideline many projects and change how things unfold.
WHAT DOES THIS MEAN FOR MINERAL OWNERS?
SMALLER ROYALTY CHECKS & PAUSED WELLS
While we do not see how royalty checks can go untouched, they should keep coming. Prices continue to edge up and the outlook is gaining bullishly by the day. Everyone is looking to end the chaotic crisis and get back to business as usual. Even with low prices, this industry can lean down and improve to be profitable in some areas. Bankruptcies have and will continue for companies not well positioned unfortunately.
LEASE AMENDMENTS & RENEGOTIATIONS IN 2021
US Oil shareholders want stronger and more secure returns, so expect major players to diversify their Energy portfolio. There will be consolidation and assets being bought and sold. Unfortunately, we will probably also see some leases in their first terms let go and some wells shut in.
PAYMENT ERRORS
The calculations are complex and errors are common. As production takes major swings and companies furlough or lay off employees, your check may rely on a new individual without sufficient experience. A minuscule typo could throw your entire revenue equation out of alignment. Are errors really that common? Yes. It’s why we have an entire department dedicated to reconciling statements, reviewing data and working with operators to correct errors for our mineral management clients.
WHAT QUESTIONS DO YOU WANT ANSWERED?
Ultimately, we are here for you. While we share big picture insights in our newsletter, your situation is unique. If you’re a GMM Client, our door is always open to you and we are only a call away. If you are not a GMM Client, scheduling your first consultation is always complimentary—that’s just how we work.
0 Comments