The negative headlines for oil and gas in the era of COVID-19 are coming thick and fast. Brent crude, the accepted global benchmark, reached a two-decade low, dipping below US$16 per barrel on 22 April 2020.
A more startling picture has emerged in recent weeks from oil future trading in the US. The collapse of demand in the face of global economic lockdown has created a scenario where overproduction has outpaced storage capacity, driving prices into negative territory for the first time in history.
The role of the Organisation of Petroleum Exporting Companies (OPEC) has also come into the spotlight amidst the evolving COVID-19 chaos. This multinational organisation was established in 1960 to coordinate the production and supply policies of its constituent nations, which today account for roughly 40% of global oil production . That spirit of cooperation has faced a turbulent period in 2020, as tensions between Russia and OPEC resulted in massive overproduction at a time when oil demand was experiencing sharp falls due to the COVID-19 pandemic. This further exacerbated the rapid fall in oil prices.
A reinvigorated round of diplomacy resulted in renewed Russia-OPEC cooperation in April, with an unprecedented cut agreed to reduce oil production by nearly 10 million barrels per day, approximately 10% of global supply. In the delicate balance of supply and demand, Russia and the OPEC nations are banking on reduced demand to boost national accounts which rely heavily on oil prices.
Russia and the OPEC nations are banking on reduced demand to boost national accounts
Natural gas is by no means immune from the impact of this COVID-19-inspired economic downturn. Analysis by global commodity agency S&P reveals abrupt price drops across all major LNG markets. Asia’s dominant JKM (Japan Korea Marker) market experienced price falls from over US$5/MMBTU of gas in January to below US$3/MMBTU by April, with expectations that prices will remain subdued for at least the six months to follow.
These price drops could have significant implications for nations such as Malaysia, which relies on its oil and gas assets as a major contributor to the nation’s economy, contributing about 20% of national revenue . While Malaysia’s national oil and gas policy is widely celebrated for its prudent and efficient management, the impact of the gap between current oil prices and a budgeted US$65 per barrel in 2020 could well be challenging.
Indonesia, Southeast Asia’s largest oil producer, is likely to face a similarly stark gap. The oil and gas industry accounted for approximately 12% of Indonesia’s GDP in 2018. While that represents a significant fall from the 22% it contributed in 2010, it nevertheless leaves the country exposed to significant shocks to these commodity prices.
First quarter production earnings in Indonesia have already been revised down 9.6% below target, as upstream oil and gas regulator SKK Migas announced a 4% cut of production in oil, and 14.2% reduction in gas. The regulator has also revised expected upstream oil and gas revenues down by US$19.6 billion this year, leading to calls for fiscal support.
The global oil and gas industry was already facing a time of challenging transformation, as the international energy transition sees markets across the world moving towards green technology and low-carbon solutions . The COVID-19 pandemic presents a further unwelcome blow that compounds the economic hurdles of that evolution.
The industry must balance the human need and industry workforce, not just the economy
Early predictions of the global energy impact now feel abundantly optimistic, showcasing the scale of uncertainty triggered by COVID-19. More recent analysis by S&P Platts Analytics estimates Asia’s oil demand will fall year-on-year by 3 million barrels a day (mb/d) in the first half of 2020 .
It’s not just the economic cost which the industry must balance, but the human need to protect the industry workforce. Energy giant BP has scaled back construction targets at its major Tangguh LNG project in Indonesia’s West Papua province, cutting the workforce in response to the need to protect workers’ health. This is just one example of the disruptive impact COVID-19 has had on global oil and gas workforce management.
While this dual-challenge marks an unprecedented struggle for oil and gas, it also finds the industry at a time where it is already in the midst of a difficult transition. That understanding could provide a valuable platform for transformation in the region’s oil and gas players.
Early indications of this transition can be found throughout Southeast Asia. Indonesian regulator SKK Migas recently developed comprehensive plans to transform Indonesia’s oil and gas industry, following a period of sustained falls in production. Embracing new technology to drive efficiency and enhance production in legacy assets is a key part of that transformation.
Technology and data-driven decisions must be a driver of efficiency in the constrained economic conditions. Upstream oil and gas operators in Indonesia saved US$84 million in maintenance costs through integrated data management by establishing an Integrated Operations Centre in 2019.
efficiency savings are only be part of the solution for oil and gas companies
Malaysian operator PETRONAS is adopting similar technologies, with a fresh drive to unlock the benefits of digital transformation announced in 2017. The company’s Remote Monitoring & Predictive Diagnostics Centre (PRMPDC) enabled adoption of predictive failure models to reduce unplanned downtime, reportedly saving the company US$20 million in just four months of operations.
Even with the benefits of technology, efficiency savings will only be part of the solution in response to this crisis. Oil and gas operators no doubt will be reviewing current investment commitments, looking to eliminate marginal and non-core investments.
Diversification to embrace new energy paradigms could also play an important role. The global economic conditions will mean those organisations with healthier reserves may benefit from acquisition of more vulnerable assets.
Reputation will also be an important consideration amidst this crisis. Oil and gas companies were facing pressures to showcase more positive social credentials even before the impact of COVID-19, with criticisms surrounding slow transitions to support the global climate crisis agenda. In an effort to reinforce their position and purpose in society, oil and gas players are stepping up to tackle the COVID-19 crisis in communities across Southeast Asia. In Indonesia, upstream oil and gas players distributed IDR5.5 billion of food and medical aid throughout major production provinces to assist local communities.
Reputation will also be an important consideration amidst this crisis.
Malaysia’s PETRONAS is also working hard to contribute to the national and global effort against COVID-19, donating over RM30 million towards battling the virus. The company is also leveraging the engineering expertise of Mercedes-AMG PETRONAS Formula One Team to develop breathing support apparatus to help with treatment of COVID-19 patients. That social conscience can go hand-in-hand with efficient new production technologies to further amplify the industry’s efforts towards a more positive social impact moving forward.
COVID-19 has created a new era of uncertainty for oil and gas. There is no doubt that these commodities will continue to play an important role in the future of global economies. The International Energy Agency’s (IEA) most recent projections estimate global oil demand will rise by 5.7 mb/d through to 2025. Yet the world’s production capacity is expected to grow by 5.9 mb/d over that same period. At a time where global economies are facing a long recovery from COVID-19, the curse of volatility is likely to plague the oil and gas industry for years to come.