Longer term impacts of coronavirus on the UK and Ireland’s oil industry

Boris Ivanov

Boris Ivanov

In the light of continued disruption to demand and supply chains, falling margins and prices and increasing fears over storage capacity we discuss with Boris Ivanov, founder and managing director of GPB Global Resources B.V., the broader impacts of coronavirus on the oil industry

Plummeting oil prices have had worldwide consequences but have been particularly painful for the UK’s offshore industry – supply chains are at risk here, with cash flows already tight from the downturn of 2016. With financially pressured companies being forced to backtrack on investments crucial to the supply chain, insolvencies and consolidations in the industry are being predicted as a result. Although many firms have been able to weather previous market volatilities during the low-price storms of 2008 and 2016, they will need to adapt further to see this latest event through, potentially making shifts in their supply chains to be able to continue their operations.

Despite OPEC+ reaching agreement to slash global output, several weeks of high production levels have meant global stockpiles are swelling. This oversupply, along with oil demand falling to its lowest level in 25 years in April, means there is little room for prices to rise. In the UK, as of March 31st sales of gasoline and diesel were down by 66% and 57%, respectively, according to the Petrol Retailers Association. With the UK lockdown set to be extended for at least another 3 weeks, demand is unlikely to improve for the foreseeable future.

Firms are also having to make significant changes to their operations in order to cut costs and protect their workforces. North Sea oil companies have reportedly cut their workforces by 40% and similar cuts are being performed across the supply chain. Several major oil companies have announced spending cuts to weather the oil price crisis. Cairn Energy is the latest operator to announce “significant reductions” to its capital expenditure across its North Sea producing assets. Oil refineries are reducing output worldwide, with many even shutting down in an effort to protect margins – in Britain, INEOS shut down a 35,000-bpd crude unit at its 200,000 bpd Grangemouth refinery on March 17th, whilst BP shut down a 70,000-bpd crude unit at its Gelsenkirchen oil refinery in Germany on March 18th. Although there have been some closures, most oilrigs, terminals, warehouses, refineries, and logistics facilities have remained open, meaning skeleton staff are still needed on-site to perform critical tasks. Strict risk assessments are being implemented to ensure safe working environments are in place and firms are assisting with the travel arrangements for key workers.

Oil and Gas UK has described the descent of the oil price as a “body blow” to the sector and called on “governments” to help. Whether government measures will be enough to save firms from going under, only time will tell.

Policymakers in countries that are dependent on petrodollars for their public finances such as Nigeria, Iraq and Saudi Arabia are facing an acute crunch.

In the longer term, many are looking towards the likely resurgence of oil demand in 2021. Once the outbreak is controlled, the global economy, particularly China and India, is expected to rebound at a notable rate. As a result, global oil demand could double or triple to make up for the lost demand.

The oil industry is resilient, but how and when things will return to normal will depend on rapidly changing variables from the global containment of COVID-19 to geopolitical stances. For oil companies, the priority is to put the health and safety of their staff and customers first and ensure the safety of their business operations. In the commercial sense, some companies will be taking every measure to survive while for others, there may be opportunities to acquire other assets and undervalued companies.

While it is simply too early to tell the energy outlook for the future as a result of the COVID-19 influence, the world will move beyond this and the business case for streamlining operations and investing in resilience planning will be reinforced and widely accepted.

 

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