As oil and gas companies await normalcy in new forms, agility and flexibility with an ability to grow production capacity to meet long-term demand are key to staying competitive, according to a new midyear industry outlook from Deloitte.

The firm gives oil and gas companies something to consider in the outlook as they navigate market uncertainties and fluctuating demand swayed by the global COVID-19 pandemic.

“In the coming months, they should balance the trade-offs between short-term cost-cutting and long-term investments so they are best positioned for the future,” Deloitte said in its outlook released July 13. “Even if energy demand drops in the coming year and the energy mix begins to change, the long-term demand for energy overall will likely continue to grow.”

In the next three months, a lower cost structure may be needed but without hindering the ability to scale production later, the firm said. This could come in the form of discharging debt and restructuring, moves several companies have taken in recent weeks.

Delaware Basin pure-play Rosehill Resources Inc. said earlier this month it entered a restructuring support agreement with its lenders and planned to file for Chapter 11 bankruptcy by mid-July. The company would join others on a list of recently declared bankruptcies that include Chesapeake Energy Corp.

Reduced spending could also come in the form of delaying certain projects or remote work such as videoconferencing and automated drilling and production processes, according to the outlook.

What is unlikely is more of the productivity gains previously seen across U.S. shale plays.

Longer lateral lengths and more sand pumped per foot led to production growth in the past, among other techniques, while simplified processes and standardization and technology along with lower service costs helped lower costs.

However, “oilfield service companies remain financially and operationally stretched,” Deloitte said.

The insight was delivered as the industry continued to endure one of its worst downturns.

WTI dropped from more than $60/bbl in early January to around negative $36/bbl in late April. It was back up to about $40/bbl on July 13.

The latest data from the International Energy Agency (IEA) showed global oil demand was down 16.4 MMbbl/d during second-quarter 2020, compared to a year ago. Lockdowns related to the pandemic were behind the drop.

Improvement is expected in the second half of the year. Global oil demand could rise 400,000 bbl/d from its outlook in June to 92.1 MMbbl/d, according to the IEA.

Demand has improved in places such as China and India, and supply cuts have helped.

Still, uncertainty remains.

“While the oil market has undoubtedly made progress since ‘Black April’, the large, and in some countries, accelerating number of COVID-19 cases is a disturbing reminder that the pandemic is not under control and the risk to our market outlook is almost certainly to the downside,” the IEA said in its oil market report.

Natural Gas, LNG

Natural gas markets, which has seen depressed prices, also face continued headwinds with power demand falling, including in Europe, and renewables displacing LNG imports in parts of the world, Deloitte said.

However, “fuel switching could dictate the recovery” and “natural gas still has a role to play in providing energy security in a lower-carbon world and can underpin economic growth in many developed and developing economies.”

Low oil prices could prove advantageous for companies with gas-weighted portfolios. Deloitte points out that associated gas production could fall by about 10 Bcf/d this year.

“Even as global gas prices are low, operators in the Marcellus and Haynesville shale plays might see their revenues rise, providing an opportunity to consolidate the fractured shale gas industry through targeted M&A,” the outlook said.

Spot prices in the U.S. show gains for the week ending July 8. The Henry Hub spot price jumped to $1.58/MMBtu, up from $1.48/MMBtu from July 1.

Adding to energy industry woes is the crowded LNG space, which saw prices sank to record lows this year below $2/MMBtu, and tight margins.

Yet, with the strongest and low-cost projects likely to progress, there also appears to be opportunity for some.

Deloitte suggested regasification terminals and regional pipelines would be a good spot for LNG players to consider investing, looking toward growth in the Asian and Latin American economies.

In addition to companies looking for the next normal in the oil market and adapting to “lower for longer” in the natural gas market, the energy transition is being eyed as part of a trend with companies weighing short- and long-term amid lower oil prices.

Energy Transition

Market turmoil has not deterred some companies from goals to lessen their carbon intensity.

Eni SpA, for example, said it remains committed to its decarbonization strategy.

“We are assessing how to speed up our plans. This ongoing evolution will allow the company to achieve a better balanced portfolio, reducing the exposure to the volatility of hydrocarbon prices, while progressing towards our targets of sustainability and profitability,” Eni CEO Claudio Descalzi said in a statement July 6. “Our changed long-term assumptions, reached four months after the outbreak of the COVID-19 pandemic, reflect our current expectations about future prices and will be incorporated in our processes of capital allocation.”

There are still ways to invest in the energy transition, even during today’s challenging times, and see benefits, according to Deloitte.

“Many oil and gas companies have been able to lower their operating costs and increase revenues by replacing older equipment, identifying sources of fugitive methane emissions, and boosting energy efficiency,” according to the outlook. “In times of tighter margins, the benefits of those programs should increase. … [Larger] companies should consider expanding their research efforts into biofuels, carbon sequestration and power trading and services so that they are better positioned for the economic recovery.”