Oil crash threatens to sink industry

Oil has plunged to its lowest level since 1999, slumping to $US16 a barrel.

Oil has plunged to its lowest level since 1999, slumping to $US16 a barrel, as a perfect storm of excess supply and collapsing demand from COVID-19 sent shockwaves through the industry and sparked a warning producers would buckle under the strain.

The international Brent oil benchmark used by Australian energy producers fell as much as 19 per cent on Wednesday to a low of $US15.98 a barrel after tumbling 24 per cent in the previous session, raising fears that prices could fall into single digits this week.

Brent oil has now shed 77 per cent of its value since January.

“Once we come out of COVID-19 you’ll see a different industry,” Beach Energy managing director Matt Kay told The Australian.

“You’ll see some projects that won’t survive and you’ll see some companies that won’t survive.

“Obviously there’s much lower demand in a COVID world which we’re all dealing with.

“The bottom line is we can’t control that.”

After US futures fell below zero for the first time in history on Tuesday, with a supply glut limiting storage options, there are rising concerns Brent may suffer the same fate with an extended period of sub-$US20 oil hitting the balance sheets of producers.

International stockpiles may reach their limits by June, according to the International Energy Agency, with a quarter of demand wiped out as the COVID-19 pandemic shuts down economies throughout the world.

Queensland coal-seam gas pioneer Richard Cottee said prices were now in free fall with no immediate remedy for the industry to counter the huge losses.

“There’s no vaccine for this one,” Mr Cottee said.

“I can’t see anything that will give it pricing support unless production drops much further.

“It’s difficult right now to tell when this is all going to end.”

The Middle East-controlled OPEC alliance, led by Saudi Arabia, has agreed to cut nearly 10 million barrels of oil in conjunction with Russia, but that only represents half the decline in consumption since the coronavirus pandemic decimated demand.

The Asian LNG benchmark price — tied to oil and closely watched by big Australian LNG producers — was also under stress after falling near $US2 per million British thermal units amid an ongoing supply glut.

While surplus supplies in the region have meant Queensland LNG exporters have directed more output to big users on eastern states, sustained prices below $US20 a barrel could see producers forced to lighten their coal-seam gas drilling commitments.

“Whether or not they’ll continue drilling in a $US20 (a barrel) environment is a real question, and if they don’t do that then this excess gas that we are currently enjoying might disappear, because they’ll need it to meet their contract commitments and that’s a real concern,” former resources minister Matt Canavan told The Australian.

“It all depends on how long it goes for but it’s certainly a risk and something for the government to think about as well, particularly as we don’t have a LNG import terminal yet to top up any supplies.”

Peter Coates, a Glencore director and former Santos chairman, said the repercussions would be felt throughout the industry.

“When you start getting below $US20 a barrel and you don’t know how long it’s going to go for, it makes you really wonder what the impact is going to be,” Mr Coates said.

“It’s hard to see how quickly demand picks back up again.”

Brent oil may plunge below $US10 a barrel amid crude storage distress, with Oil Search potentially caught up by rising regional tank levels, Citi says.

A prolonged period with regional tanks at capacity would threaten Oil Search’s PNG LNG production, given its problems in storing liquids from its Kutubu and Hides oil and gas fields.

“If Oil Search can’t access buyers then it risks LNG production being shut in because of nowhere to store condensate,” Citi analyst James Byrne says.

The broker says liquids from Kutubu and Hides would have to go into Oil Search’s storage tanks at its central processing facility and Gobe, assuming its Gobe, Moran, Agogo and Usano oilfields are shut in.

They would provide 10 days of storage cover, potentially extended by reinjecting some liquids back into Oil Search’s oilfields.

Still, with Asian customers likely to buy the company’s liquids blends, it will take a “prolonged period” of regional crude at capacity to threaten the company’s LNG production.

Brent oil fell a further 4 per cent on Wednesday to $US18 a barrel after sliding 24 per cent in the previous session.

Citi now expects periods of Brent pricing in the single digits and holds a $US17 a barrel forecast for the second quarter.

Big producers Woodside Petroleum, Santos and Oil Search have already taken the axe to spending this year after prices cratered by more than half.

Only Oil Search has so far tapped shareholders for equity through its $1.2bn raising, but a longer period of depressed prices could spark further emergency measures.

Australia’s biggest listed company, Woodside Petroleum, fell 1.5 per cent to $19.60 on Wednesday.

Oil Search fell 3.6 per cent to $2.41, Santos declined 0.5 per cent to $3.99 and Beach Energy decreased 3.9 per cent to $1.24.