Towards the “new normal” – Clarissa Lins, from IBP, and Adyr Tourinho, from ABESPetro, comment on the current situation and the future of the oil and gas industry in Brazil

May 4, 2020

ABESPetro and IBP are committed to seeking joint solutions to overcome the unprecedented crisis in the oil and gas industry. If, on the one hand, the focus on adopting measures to preserve the health of employees is a consensus between the two main entities in the sector, on the other, disagreements on commercial issues tend to appear. The president of IBP, Clarissa Lins, and the CEO of ABESPetro, Adyr Tourinho, gave a joint interview to Brasil Energia about the current situation and the future of the industry.

After more than another month of social isolation in Brazil, what are the main lessons learned?

CL – The first lesson is the ability to mobilize and pre-dispose of cooperation to share the best health practices, protection of employees and continuous provision of essential services. IBP formed a crisis committee, ABESPetro joined, and with that, we can learn, react and influence more than individually. As an industry, learning is that uncertainty is so great that we cannot work with the planning horizon on a regular basis.

AT– Something that became very strong was the spirit of collaboration. Increasingly, mobility restrictions became a barrier, as well as the emergence of symptomatic cases, and the combination of these became increasingly difficult to maintain operations. The legacy of this work is the collaboration and success that we are achieving in managing the crisis, with priority for people and the integrity of operations.

Is it already possible to understand what needs to be corrected?

CL – Perhaps one of the great lesson is how to prepare companies and industry, in general – perhaps society and governments – at very high impact and very low probability risks. The other is how to increase resilience. If we could do it differently, we would certainly work as an industry that survives more and more at lower prices, with the capacity to withstand for a long time an adverse effect like this of a barrel around US $ 20.

AT – If there is a lesson we are learning, it is that, alone, we cannot get out of this crisis. We have to be prepared to react. The companies that manage to get out of this abyss in which we are now will come out stronger and more willing to exchange experiences.

Despite the unpredictability, do you have a projection on the new price level of the barrel?

AT – We are experiencing a new supply and demand crisis, but on a totally different scale. OPEC + speaks of a 9.7 million bopd reduction. World production was at 100 million bpd. The International Energy Agency estimates that demand reduction reaches 30%. When mobility returns, the pent-up demand will return; this is an abnormal peak. But, even so, there is a situation that is real in the world, of supply greater than demand. With regard to price, as it is an issue that we do not control, we do not get too attached to it.

CL – The effect of the OPEC + agreement has not yet reached the market, which causes prices to remain depressed because there is neither the prospect of a pattern of resumption of demand nor the benefit of reduced supply. In addition, there is the “price effect”: demand is inelastic, so flat that it no longer reacts to prices. Given the fragility of the global economy and the consequences in terms of business interruption, company breakdown, lack of access to credit and liquidity, we are not betting today on robust prices in the next two years. Whether it’s going to be $ 20 / barrel, $ 30 / barrel, $ 40 / barrel, we don’t know. Now, there is no one who foresees prices above US $ 50 / barrel in this biennium. The big lesson is how to prepare and how to operate in this very depressed price environment.

What will be the impact of the cuts in Brazil?

AT – Companies that have projects where the break even demands a higher barrel price, such as post-salt assets and field revitalization, will find it very difficult to implement their investment plans and even survive during the crisis. Pre-salt projects are very likely to follow; maybe they can be postponed a little, but they will happen. The problem is that, in the short term, the goods and services industry would gain momentum precisely with the projects that will be most affected by the barrel reduction, such as Petrobras’ post-salt, revitalization and divestment systems.

CL – We have been continuously monitoring the announcement of capex and opex reductions by major operators globally and, on average, the cuts have been 30%, including Petrobras. In our view, these 30% cuts are the first, reflecting the barrel drop to $ 35. If the barrel stays at $ 20 / $ 25 and the global recovery follows a “U” pattern, we may see more cuts ahead. It is a scenario of great concern. Of course, each company has its own portfolio and will look into it, analyzing its obligations.

How do ABESPetro and IBP see and work on resuming activities?

CL – The first focus is to increase our testing capacity. The resumption can only occur by preserving the health of employees and, therefore, increasing the industry’s testing capacity and reducing uncertainties about infected populations interacting with non-infected populations.

Is this an industry consensus stance?

CL – I would say yes. What we are doing now is to work on a protocol of standards that can be shared between companies, precisely with regard to testing for return and continuity of work, with necessary security. We have created a subcommittee within the crisis committee, which is focused on this topic. In addition, we have companies operating in other countries that are already preparing for their resumption and are sharing health and personal protection practices for their offices.

AT – Companies like Baker Hughes, where I work, are resuming activities in some countries. There are protocols that we will have to adapt to the reality of Brazil, but this is well underway. [Since the last crisis], operators have recovered margins and profitability, but the reality is that goods and services companies still suffer a lot from extremely compressed margins. At Abespetro, our concern is that the natural solution to an economic crisis tends to be “we are going to tighten the supply chain”, but today, we no longer have that space that was in the past. Operators will have difficulty with the current oil price, but it is no use trying to resolve it by passing the bill only to the goods and services sector. It will take dialogue, a very strong conversation because, without the chain of goods and services, operators will not survive either. We will have to find a solution together. You can’t pass the problem on to the other.

Do IBP and ABESPetro have any type of action with the government to guarantee lines of credit for small and medium-sized operating and supplier companies?

AT – This is one of Abespetro’s priorities. Most likely, we will go out with a working group to deal specifically with the resumption issue, with concrete actions that we will propose to reduce the economic impact on goods and services companies. And, with the operators, again, it will be necessary to have dialogue because, if they pass the bill to the service companies, many will not survive. And I will not say that it will only be small and medium. Some large companies will be able to rethink their position in the country because they are global and will assess where they will have the most attractive return, and that is what we want to avoid.

CL – IBP’s principle is not to engage in commercial issues between different links in the value chain. Regarding the resumption, where we have an active participation, it is absolutely essential to maintain a stable, predictable and competitive business environment. Our entire approach to the government is not via a credit line, but in relation to our old mantra that we have to maintain the existing rules to position Brazil, globally, in a competitive and attractive position for investments. In this context, we again ask that the advances made in recent years do not suffer setbacks and that, as far as possible, we can advance further in macro-agendas that provide even more competitiveness, such as adopting the single concession regime.

Does the succession of political crises that the country is experiencing in the middle of the pandemic and the drop in the price of the barrel raise the Risk-Brazil?

CL – Brazil – Risk is priced, high and growing. Political noises end up interfering in Brazil’s image as a safe and predictable place to do business.

AT – We are a long-term industry. When an operator makes an investment in a project in the pre-salt, it is making a projection of 20 to 30 years, so the most relevant variable is the credibility in honoring contracts. There is a risk-Brazil pricing, but also a confidence that the country will continue to honor contracts, and, at this point, Abespetro and IBP have a very similar position.

Will the crisis impose changes on the oil and gas industry?

CL – Behaviors will change. Our ability to better understand how resilient we are, respect science and invest more in collaboration and cooperation as a society and industry. I understand that the focus is on health and that we will have to find ways to adapt to a “new normal” that we still don’t know how it will be.

AT – Definitely, the digital transformation, which has always been a taboo in our industry, is happening. Customers who previously did not let drilling data leave their networks have completely changed. If it weren’t for that disruptive way, it might take another two decades. This happened within a month, and I think it will stay. There will be an exponential acceleration in digital transformation. Technology is bringing benefits and efficiencies that we did not experience before this crisis.

Does the future of oil persist?

CL – As far as the economy needs energy density, the way we need it, yes.

Source: Brasil Energia

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