How COVID-19 Has Impacted the Oil Sector

Tue, 21 July 2020 11:50

The spread of coronavirus poses a significant threat to the global oil industry. Sharp and drastic actions taken to contain the spread of infection disrupts many of the sector's essential everyday processes. Workers offshore have to practice social distancing while living and working in confined spaces. Travel restrictions and lockdown practices have already hindered industries' ability to conduct meetings and travel for various reasons. The uncertainty of the pandemic does not help with this type of volatile sector.

This type of uncertainty is also tied to the lack of historical evidence for the phenomenon in the oil and gas industry. According to the International Energy Agency (IEA), the 2003 SARS pandemic was one such event. In the recent events unfolded due to the COVID-19 pandemic, China's role has mainly changed over the last two decades. China's oil demand doubled, and in 2019, China's growth accounted for more than 80% of the global oil demand.

In February, the demand for oil had fallen by 435,000 barrels per day in the first quarter of 2020. Such a drastic change was recorded after a decade. In March, the agency noted that the Chinese economy's slowdown is also responsible for the collapse in the global oil demand for 1.1 million barrels per day (BPD) compared to 2019 and slashed its annual growth by more than a quarter to 825,000 BPD. This was the lowest growth figure recorded since 2011.

Rystad Energy, an energy research firm, predicted that a 25% decline in oil prices would lead to gas and oil investments being cut by USD 30 billion globally, cutting and economic lifeline for an industry that has already been looking for long-term decommissioning projects rather than hunting for new opportunities. As a result, the pandemic poses an existential threat to the oil and gas industry. The socio-economic challenges force this conservative sector to adapt to the rapidly changing environment.

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Dropped demand and prices

The pandemic has engulfed the oil and gas industry with significant uncertainty, and China is leading the way. Carbon Brief states that the percentage of oil refineries in province Shandong fell from 71.4% in December last year to 38.9% in a span of just two months, a collapse that shed light on the sudden industrial outage. The figures presented by the government showed a 3.3.% decline in crude oil processing in January and February 2020, compared to the same period in 2019, and a 6.6% fall in the production of refined oil.

The fall in the production has caused a similar decline in the prices as well. Trading Economy presented figures that show that the price of oil per barrel has collapsed in the last four months. The drop has been observed via two periods of notable declines: a fall from USDF47.80 to USD 30.16 in March and a fall from USD 33.33 to USD 20.23 in the second half of the same month.

These two figures are past the scope of reports released by the Chinese government, which showed a 3.5% increase in the total crude oil production as compared to the first two months of 2019. But there is a significant concern regarding this brief improvement that oil production across China could be dropping.

These challenges have also created problems with social and economic costs incurred due to the virus. Yvonne Telford, senior analyst for north-west Europe at Westwood Global Energy, explained that there are two avenues that companies are focusing on at the moment, the health and safety of its workers and maintaining the security of supply through this crisis. But the companies also need to look into the oil prices and other essential activities.

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Structural issues

The crisis has also given rise to a lot of structural issues. Telford highlighted the fact that the diversity of the corporate landscape in the UK will be an essential contributor to this urgency to produce more oil. Oil Industries in the UK and Norway simply have to keep producing more oil, which is a different feat to achieve during the pandemic. The mixture of different operators and companies, big and small, that are operating in the UKCS means that a single administrative body cannot put a separate policy to regulate the oil production and supply in these regions.

Maintaining production is so high that the operators on the UKCS are ready to keep working even if they incur a loss. Westwood's article stated that cost, comprised of expenses and planned capital expenditures, had reached over USD 15 billion. Unless the price remains stagnant at USD 27 per barrel, these operators will not be making enough money to cover these expenses.

Looking ahead

Experts are still optimistic about some aspects of the oil industry's response, indicating towards events like the 2013 oil price crash, which saw a massive decline in prices in just two years, helping the UK oil industry to gear up for future challenges. Researchers have also highlighted the industry's efforts to align operational expenses with the profits from selling a barrel of oil. The reports noted that 11% of the forecast for the UK's oil production comes from the assets with costs of under USD 20 per barrel produced, compared to 2% in Norway.

This amount is still considered less to address the fundamental issue raised in this rigid industry, and companies worldwide need to adapt quickly. The nature of the private oil production, amplified by the companies operating in the UKCS means that the majority of the oil and gas industry cannot change the course of its operations fast enough to safeguard themselves from the consequences coming from a crisis like this, and even smaller businesses are struggling to wield it effectively.

The collaboration between organizations and companies is always considered to be beneficial for the oil and gas sector. For companies to collaborate on a global scale, OPEC and OPEC Plus are two groups that are well-positioned to understand the negotiations needed to agree upon production terms, production levels and to stabilize the oil prices. The reports give a positive outlook on the stabilization of the oil industry later this year. Still, it could only be achieved if oil companies globally work together and bring the production and the prices to a steady-state.

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