BY: Steve Parent, Oil & Gas Co-Chair
According to industry insiders, COVID-19 continues to reduce demand for oil and gas. As long as viral spread prevents air travel, jet fuel demand will remain suppressed, leaving oil prices lower. Natural gas prices have spiked as gas production declines have constrained supply, tightening the market, and as the call on U.S. Liquefied Natural Gas from the world market grows. Following virus suppression, there will likely be a surge in pent-up demand.
Midstream operators have indicated there may not be significant improvement until 2Q or 3Q 2021. Many large projects have been canceled or placed on hold, but some small projects have come online. There has also been a lot of restructuring going on with the midstream companies as they position themselves for the next uptick. This includes some reductions in force and early retirements. The short term outlook is still hazy but market participants generally believe things will improve toward the middle of 2021. Given that midstream asset values are well below what they were 1-2 years ago, absent some compelling reason to sell at depressed values, mergers and acquisition activity will not likely be significant until at least the second of 2021.
The Biden administration will likely seek to accelerate the use of renewable energy and move away from fuels like natural gas. Current rules will be reassessed and midstream operators will have to adapt to this new reality. U.S. production will increasingly focus on exports to developing economies. In general, costs are going up, greenfield projects will be challenging to gain approvals, and operating and development risk is increasing.