Covid-19 impact on the energy sector: Switching on or off?
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Covid-19 impact on the GCC’s energy sector: Switching on or off?

Covid-19 impact on the GCC’s energy sector: Switching on or off?

The energy sector continues to be the biggest pillar powering the growth of GCC economies. But as it reels with the impact of the historic oil price drop and the Covid-19 pandemic, is the outlook for the future brighter?


The year 2020 will go down in history books for several reasons, but for the energy markets, it will mark the historic year when oil prices plunged into negative territory.

While the oil market has since recovered – specifically in May, after output cuts by producers across the world including the OPEC+ alliance, prices remain subdued as supply looks to realign with sluggish demand.

Looking at the GCC, where oil and gas continues to be the main industry powering local economies, the double whammy of the oil price drop along with the impact of the Covid-19 pandemic has dealt a heavy blow, with the revenue hit estimated at around $250bn during 2020, according to Sherif Elhaddad, executive director – head of MENA equities, Al Mal Capital.

“This massive decline in revenues is taking place at the same time that governments need to inject unprecedented stimulus in order to keep afloat both private and public sector businesses. This combined effect is putting significant pressure on the reserves of regional economies,” he explains.

“While the energy sector is still profitable, serious cost cutting measures are needed to reduce the total cost per barrel and increase the dividend paid to the governments. This impact will be more significant for the service providers, creating more competition with smaller margins. This will eventually lead to consolidation in the sector,” he adds.

The first consequence of the current crisis is a possible restructuring of the oil and associated gas industry, agrees Dr Leila R Benali, chief economist and head of Strategy, Energy Economics and Sustainability at the Arab Petroleum Investments Corporations (APICORP).

“This will accelerate both the closure of the lowest efficiency parts of the capital stock producing assets and companies, and mergers and acquisitions in the market. Barrels with high operating costs and limited storage access would shut in first. There are plenty of low-opex barrels competing for a diminishing market, and a large part of them are located in MENA.”

So far, the response from industry players to the crisis has largely been that of cutting costs – either in the form of new projects or by asking contractors to reduce costs on ongoing contracts.

But there are a number of response strategies that the industry can consider for managing the situation, opines Abhay Bhargava, senior director, Industrial Practice, Middle East and South Asia at consultancy Frost & Sullivan. Those include digitalisation to improve production and reduce downtimes; going downstream to manufacture and export high value products for global markets; investing in decentralised and decarbonised energy generation; and focusing on sustainability.

One major change that the regional industry has seen since the last oil price drop in 2014 has been digitalisation, concurs Georges El Mir, vice president of Oil, Gas and Petrochemicals, Industrial Automation Business at Schneider Electric.

“Since the last crisis that hit the oil and gas sector, the industry initiated a large transformation to become more agile by reducing drastically the operating costs and putting additional discipline on the capital spending. And given that digitalisation is the fastest way to efficiency and agility, that’s where the money will go.”

According to El Mir, the industry is seeing an increasing use of technologies such as ‘digital twins’ – a virtual replica of a physical asset which replicates geometry and all other data elements to help operators improve efficiencies. Implementing such technologies will help reduce costs while optimising operations.

So, when will the energy market rebound?

“If I knew that, I’d be a rich man,” quips El Mir – although uncertainty about the future is one thing all experts agree on, especially with lack of clarity around the coronavirus situation.

“We reached consensus on many things, but there is no consensus on demand elasticities. This will be determined by the length of the lockdowns — and possible second wave — and by structural impacts on productive capacity in the wider economy, as well as structural demand behavioural changes post-Covid-19,” explains APICORP’s Benali.

“Notwithstanding major differentials between crudes and discrepancies between physical and futures markets, one outlook for oil could therefore see Brent prices average $30-40 in 2020 and 2021 before reflecting a more balanced market.”

Elhaddad from Al Mal is more optimistic. “Overall, we expect further supply cuts to take place and this would bring stability to the oil price from H2 2020 onwards. Due to massive production cut and some demand recovery, the market is expected to move from massive surplus in 2020 to even a deficit in 2021.”

In terms of expansion, it is unlikely that large and complex new projects will see the light of day anytime soon, as these require longer runways while tying up much-needed capital, states George Hanna, CIO and portfolio manager at AD Investment Management.

“It is becoming more likely that producers’ pursuit of rational economic returns in the wake of the scarring dual demand/supply shock could bring stability to the industry – albeit at lower clearing prices – as soon as the inventory glut is reduced but sooner than is expected by pure modelling of the demand side,” he states.

“The longer low oil prices persist in the midst of a systemic reduction of maintenance and development capital expenditure, the larger the probability of a longer-term supply deficit when oil demand ultimately rebounds.”

Long term, the indirect impact of the pandemic will lead to downward revisions of economic outlooks, says Benali.

“We also expect governments’ opening up plans to be increasingly flexible and reversible. Therefore, the energy industry will have to adapt to a potentially long downturn with periods of volatility.”

Adds Bhargava from Frost & Sullivan: “More diversity in the energy mix, increased focus on storage for resilience, increased downstream play, industry consolidation, and technology substituting manpower are some of the prominent changes we can expect to see moving forward.”

One positive outcome from this crisis could be the increased spotlight on sustainability.

“No single event – be it a war, a recession, or previous pandemic – has had such an impact on CO2 emissions as Covid-19 has had in a few short months. Pre-pandemic, sustainability and energy efficiency were already on top of the agendas of oil and gas CEOs. Post pandemic, safety and sustainability will become the new licence to operate,” states El Mir from Schneider.

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