The Covid-19 pandemic has shattered oil demand, sunk prices and is posing a significant risk for those involved in oil extraction and processing. Is an industry traditionally thought of as resistant to change, properly equipped to deal with this crisis?
The spread of Covid-19 poses a significant threat to the global oil and gas industry. The increasingly drastic action taken to reduce the spread of the virus interferes with many of the sector’s key processes: offshore workers have to balance maintaining social distancing while living and working in confined spaces; travel bans and quarantines inhibit companies’ ability to travel and conduct meetings; and the uncertainty that runs through the pandemic does nothing to reassure a historically volatile industry.
This uncertainty is furthered by the lack of an obvious historical precedent for the phenomenon in the oil and gas sector. The International Energy Agency (IEA) has pointed to the 2003 SARS pandemic as a loosely analogous event, but noted that a centrepiece of both the Covid-19 outbreak and the global oil industry, the part played by China, has changed dramatically in the last two decades.
As the agency notes, since 2003, China’s oil demand had more than doubled, and by 2019, Chinese growth accounted for more than 80% of global oil demand growth.
The disruption to Chinese oil has had repercussions felt around the world; in February, the IEA noted demand had fallen by 435,000 barrels per day (bpd) in the first quarter of this year alone, the first quarterly contraction in demand in more than a decade. The following month, the agency reported that the shutdown of the Chinese economy in the wake of the virus has triggered a collapse in global oil demand of 1.1 million bpd compared to 2019 figures, and slashed its annual growth forecast by more than a quarter, to 825,000 bpd, the lowest growth figure since 2011.
Energy research firm Rystad Energy went a step further, predicting that a 25% decline in oil prices could see oil and gas investments cut by $30bn globally, severing an economic lifeline for an industry that has already been casting its eye towards long-term decommissioning projects rather than new drilling opportunities. As a result, the pandemic could prove to be an existential threat for the oil and gas industry, as social and economic challenges force a historically conservative sector to adapt to a rapidly changing environment.
While there are some causes for optimism, notably the industry’s response to the 2014 oil crash providing a basic framework for future crisis management strategies, it remains unclear if the oil industry is properly structured to respond to this emergency.