Long-Term Shift in Oil Sector
This is English ver. of original Japanese article below;
Oil and petrochemical products are closely related to our daily lives and are one of the most important fossil fuel resources in the world. The oil sector is divided into three different sections: upstream (extraction and production), midstream (transportation to refineries), and downstream (refining at refineries and retailing). This post will briefly summarize the trends in the industry (which could have been exacerbated by COVID-19).
As written in several notes (see above in Japanese), the shale revolution in North America and the rise of Russia on the back of oil/gas in recent years have made it difficult to control the upstream, which used to be centered around the Middle East and OPEC (Organization of Petroleum Exporting Countries), and this has led to the excess supply of oil around the world. And oil majors began dumping its oil reserve.
Following the oversupply in the upstream, downstream refineries were affected by the decline of global demand, and became even more overcapacity in their section. As described in the article below, refineries are also a section that requires long-term investment, and their business model is to operate constantly to earn a certain margin of profit for the long term to pay it back.
Restructuring of facilities (i.e. closure of some refineries) may temporarily improve the profitability of the operators for awhile, the issue is going to be more complicated. This is because shifting to non-traditional sources of energy (i.e. renewable energy, energy conservation, and hydrogen) based on a rise in environmental awareness along with the Paris Treaty will likely lower the demand for oil products. In addition, government response to such changes are different around the world, as some governments seek to keep the refineries for their national security perspective.
"Analysts see the outlook for the refining industry as similar to that after the financial crisis, when margins finally recovered due to the permanent closure of a number of refineries.
It is difficult to predict which refineries will close in the future as governments often roll out bailouts to secure domestic oil supplies and keep jobs."
Moreover, because these are facilities, continuous investment in these refineries is essential to maintain the competitiveness (i.e., how efficiently they can be refined at low cost) over the medium to long term, and competition from new refineries (usually at a lower cost) should be more intense, which creates a vicious cycle for old ones.
While the intangible assets of companies in the platform business, such as GAFA+M, are highly valued in stock market, the value of heavy equipment (including oil production and refining), which was previously seen as strategically important and hard collateral because of tangible asset, is likely to decline in value. Maybe this trend is not going to change anytime soon.
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