The global oil and gas industry is facing a crisis and the US is at the frontier of the storm.

The global oil and gas industry is facing a crisis and the US is at the frontier of the storm.

Shale oil industry contributes almost 70% of total oil production in the US. Extracting shale oil is more complex than extracting conventional oil, utilizing a method called “hydraulic fracturing”, or fracking. This method factures the rocks in shale to expose oil. The extra technology introduces more cost to the extraction process. As a result, the US shale oil industry has been a capital-intensive sector for years, relying heavily on debt financing from the capital markets. The current oil price crisis could push many US shale oil players to the edge of bankruptcy.

Global crude oil prices dropped from around $65 per barrel at the beginning of 2020, down to $14 per barrel by the end of March. To respond to the price decline, many US shale oil companies have been forced to shut down existing drills and delay new projects. US oil production dropped around 15% in June from March and the number of operating rigs dropped 56% in May.

The US shale oil upstream sector has been a major consumer of electric motors. Production from a typical fracked oil well falls by 60% after the first year of output, so companies must keep drilling new wells in order to maintain levels of oil production. Previously this had driven high levels of investment in motor and drive technology. However, as many companies are now forced to shut down oil production and to delay new projects, the motors and drives market in the upstream sub-sector is expected to decline considerably. Omdia expects the motors and drives market in the US oil and gas upstream (onshore) sector to decline by 11% and 4% respectively in 2020, if the global oil price remains stable at the current range. The offshore sector, which has a much higher cost and more sensitive to the oil price decline is likely to be the worst affected sub-sector with motor and drive sales declining by 14% and 6% respectively.

Despite the price of oil rebounding above $40 per barrel, the current price is still lower than the US shale oil industry’s breakeven, which is around $46 per barrel. This means the current price is still not enough to support the industry to fully reopen. As a result, the demand for new motor and drive solutions in the oil and gas sector will remain continue to decline, in the near term.

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The oil price drop is primarily due to a decline in downstream demand for oil because of the impact of COVID-19. Many downstream manufacturing industries, such as chemical, had to shut down due to the restriction orders. Additionally, consumer demand dropped around the world due to restrictions on air travel and reduced private vehicle usage.

The midstream sub-sector is less affected than the upstream, but the decline of upstream operations will deter midstream players from business expansion and investment, hindering short-term growth. In the midstream sub-sector motors and drives are mainly used in compressors and pumps in the pipelines. The US oil pipeline total mileage has grown steadily for several years, but momentum has slowed since the oil crisis in 2015 and 2016. Since then, midstream players have become more cautious, investing in less expansion projects.

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Omdia expects the motors and drives market in the midstream sub-sector to decline 3% and 2% respectively in 2020, but recover in 2021, with 1% growth.

The downstream subsector is least affected by the oil market crisis. US downstream capacity and utilization data suggests that the downstream industry never fully utilized the refining capacity available and therefore the prosperity in upstream and midstream does not affect the downstream market. As a fact, the downstream industry has a more stable growth pattern over the last ten years, with long-term CAGR of around 1.0%. The annual growth rate fluctuated in a short range, depending on the oil prices. The oil price decline and oil inventory stacking produced slight incentives for downstream companies to expand business as they benefit from lower oil cost.

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Therefore, Omdia expects the US oil and gas downstream sector for motor and drive to witness a slightly higher than historical average growth of 0.8% and 1.1% growth for 2020 respectively.

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Opportunities still exist in the motor and drives market, especially for premium products in the retrofit market. Electric motors in the oil and gas sector consume around 60%-70% of total electricity, with the downstream sub-sector reaching up to 80%. During the lifespan of an average electric motor, the energy cost might make up 90% of total lifetime costs and thus the 2%-3% energy efficiency improvement means a lot of saving. Therefore, many companies tend to replace the broken motors with a higher energy efficient motors, even at a much higher purchase cost.

Since the last crisis in 2015 and 2016, investors in the oil and gas industry have changed strategy, becoming more cautious to new investment and projects with long payback periods. Capital market funding in the oil and gas sector has declined since 2016. The lack of external funding forces the US shale oil companies to rely more on their own cash flow, putting more pressure on these companies and identifying weakness in the industry. As of 29 June, more than 20 companies have gone bust.

It is uncertain when the downturn for the market will end, but it is reasonable to estimate that after the current crisis, the US oil and gas sector will slow down its expansion, providing less opportunities for motors and drives.