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SPECIAL FEATURE
By Shelley Milne
The ‘Pandemic’ problem how world health impacts the Energy Industry
China is in trouble – and, potentially, so are we. Under the looming threat of a global pandemic, the impact of China’s curtailed industry is unquestionably having an impact across the energy sector.
As Taqa actioned its offshore containment strategy to quarantine an offshore crew member in the North Sea, many other operators in the North Sea area were forced to curtail travel and impose restrictions on crew who have recently returned from known hotspots. From manufacturing and supply to manpower, logistics and energy demand, the challenges to industry are slowly, but surely, making themselves known in a variety of ways. As officials work to contain the spread of the virus, Global energy markets are reeling, prompting OPEC and allied producers to consider tightening supply as China, the world’s top consumer of oil and natural gas and Asia’s largest oil refiner, slashes energy output by 10%.
Why does it matter? The question of a global flu-based pandemic is not a question of if, but when. In 1918, the Spanish Flu pandemic killed more than 50million people worldwide. At this time, people were travelling internationally, but on a much smaller scale than today and the impact on individual industries was limited.
The IHS report said “any slowdown in the Chinese economy sends not ripples but waves across the globe,” highlighting that China’s oil demand constituted 7% of world oil demand 17 years ago, compared with 14% today. As concerns grow, reports from the International Energy Agency (IEA) predict that demand is set to fall year-on-year in Q1 for the first time since the 2009 financial crisis, while OPEC has also cut forecasts through 2020.
With Brent crude, down roughly 15% since first reports of the virus spread, global commodity trader Trafigura Group predicted cuts Today however, Industry is, to global demand growth by approximately 300, 000 barrels per unquestionably, mobile – and this day (bpd) to around 1million bpd. holds true for the Energy sector. While the Coronavirus is, at IHS Markit also predicted that industrial energy this time, a mild pandemic demand may decline by up to 73Billion kWh. This by comparison, our cut equates to around 1.5% of industrial power workforce, tools, parts consumption in China, but as the world’s and products travel largest consumer of electricity, this loss can extensively and Around 90% of the be equated to the power used by Chile, a often, exposing silicon “wafers” South American country with a population of the industry to used in the United 19.12million people, underscoring the scale the unpredictable, of the disruption. States originates and uncontrollable in China impacts of global While supply and demand are key economic health emergencies. factors, the threat to the workforce is also a humanitarian concern. With the first case now Since first reports began confirmed in Africa, one of the fastest growing circulating, oil prices have energy economy regions, operators and service stumbled, liquified natural gas companies working in this area, will need to consider how has gone undelivered, solar panel best to protect their workforce. production has slowed and motor vehicle manufacturing has languished As China remains a global manufacturing giant, let’s take a look at or halted completely. some of ways which Coronavirus is impacting the energy sector at this time. In early February, analysis by Rystad Energy suggested that “As the spread of the Coronavirus does not yet appear to be slowing down, concerns are rising among LNG sellers,”. Early reports of reduced travel and economic activity in China pushed down oil prices to their lowest level in a year. OPEC+ Group Similar concerns were echoed in struggled in late January to agree deepening cuts to joint production reports from IHS Markit which in efforts to tighten markets, with Russia agreeing in principle, but predicted a much larger impact on refusing to sign off on the deal at that time. Further output cuts are the global economy of Coronavirus expected to be announced at the OPEC+ Group meeting in March, than the previous SARS outbreak, and analysts are optimistic of Russia’s support this time. due to China’s current position as second largest economy today – “The Russians have pretty much signalled that everyone is on notably increased in importance board for OPEC+ delivering deeper production cuts,” said Edward from its previous position as sixth Moya, senior market analyst at OANDA Corporation in New York largest in 2003. adding “As long as the Coronavirus does not show strong signs that the spreading of the virus is intensifying, WTI crude could make a run towards the mid-$50s,”
OIL
This optimism of deeper cuts from the worlds biggest producers fed industry confidence and by mid February, Brent crude increased 32 cents, (0.6%) to $56.11 a barrel, with United States’ West Texas Intermediate crude oil (WTI) up 14 cents to $51.31 a barrel. OPEC’s lowering of its 2020 demand forecast by 200,000bpd, citing the Coronavirus outbreak in China as the world’s largest crude consumer, contributed to a steadying of pricing across the market. However, Price Futures Group appear keen to manage expectation around this. Oil Analyst Phil Flynn is quoted in US media saying that traditionally, the Russians are known for playing “hard to get” and that there is a seasonal element to these discussions, due to the fact that Russian Oil export drops over winter, while they retain it for domestic use. This may make the Russians more amenable to a deal but raises questions regards what the Plan B might be, should they refuse, saying; “If that’s the case, now you’re going to be talking about 500,000 bpd of oil more on the market, and that’s definitely going to depress prices again.”
www.ogvenergy.co.uk I March 2020
