The former head of BP and the fracking firm Cuadrilla has warned that oil prices will remain low for “some considerable time”.
Lord John Browne said supply during the Covid-19 pandemic was outstripping demand and cuts in production due to come in next month were “far too small”.
Speaking on the BBC’s Today programme, he said:
“Generally, in the world, demand is down, production is still high, and as a result the prices will be very low. And I think they will remain low and very volatile for some considerable time.”
“Demand is down probably around 30% and the production cut was around 10% so obviously there is still a lot of oil being produced that is going into storage and not being used.
Because of the Covid-19 outbreak, he said:
“People simply are not flying, they are not driving, industry is slow, so obviously demand is down significantly.”
Lord Browne said the oversupply was “very reminiscent of a time in the mid-80s” when, he said, oil prices stayed low for 17 years.
The US benchmark price for oil, West Texas Intermediate (WTI), dipped at one point yesterday to minus $37 a barrel. This was the result of futures trading on contracts for May, which were about to expire, and traders could not find buyers with storage capacity.
At the time of writing, WTI for June delivery was $14.53 a barrel, down nearly 29% on yesterday’s close.
The British benchmark, Brent Crude, was $19.94 a barrel, down 22% on yesterday’s close. Three months ago, it stood at $64.59 a barrel.
Oil company warnings
In the past few weeks, several UK onshore oil companies have warned about the risks of prolonged low oil prices.
Earlier this month, IGas – the UK’s second largest onshore oil producer – said it could meet its commitments if prices were $20-30 a barrel for the rest of this year.
But it forecast:
“should oil price or demand (and therefore revenue) fall further, the Company may not have sufficient funds available for 12 months from the date of approval of these financial statements.”
This and other material uncertainties “may cast significant doubt on the group’s ability to continue as a going concern”.
IGas said it had shelved some exploration plans in Surrey until energy prices improved.
Also this month, Egdon Resources said its older UK onshore fields were unprofitable at what were then current prices.
It said it had cut work programmes offshore in Ireland and Morocco and would concentrate on production from the Wressle oil site in north Lincolnshire, which it predicted could break even at $17.62 a barrel.
Europa Oil & Gas, one of the other main investors at Wressle, said it had cut salaries and cancelled non-core contracts because of the Covid-19 outbreak and oil price falls.
The company’s interim chief executive, Simon Oddie, said:
“These are challenging times for the oil and gas exploration and production industry with the combination of market turbulence and depressed oil prices.
“We have responded by making appropriate cost savings and adjustments in the business whilst maintaining the integrity of our core strategy.
“Further economies will be made if conditions do not improve in the medium term.”
UK Oil & Gas, which has sites in Sussex and Surrey and has plans for the Isle of Wight, also said it was cutting costs.
At the end of March, the company said:
“the Group has delayed its capital expenditure programme across its assets as the effects of Covid-19 have significantly constrained the supply of specialist oil sector services, equipment and civil engineering activities.”
It said it was “actively reducing operating costs” at the Horse Hill oil site near Gatwick Airport. It said the cost reduction exercise would continue, “with the aim of positioning the field to at least break even at current Brent prices”.
At the time of writing, UKOG shares were down more than 8% at 0.275p. Egdon Resources was down 9.52% at 1.90p. IGas was unchanged at 29p and Europa unchanged at 0.95p.
Climate and health lessons
Asked if we had passed the moment of peak demand for oil, Lord Browne said “That is quite possible”.
He said the amount of oil used for every unit of gross domestic product had fallen by about 1.5% a year.
He said the demand for hydrocarbons would continue to be weak as people became more aware of what he called “the very bad effects of carbon dioxide” resulting from burning oil and gas.
He said the Covid-19 outbreak was teaching people that health was “a primary concern”.
“Lungs are very important. What you breathe is important. So that’s, I think, a big lesson.
“And the second big lesson is that we don’t mess with nature without some consequence. And this is very much the case here with the virus and climate change is no exception.
“If we don’t do something, we will be hit by some changes that we will not like and will be very difficult to get out of.”