Covid-19 impact on the regional energy sector: Is it set for a rebound?

1. How will OPEC+’s extension of oil production cuts affect the Middle East’s oil sector?
Initially, OPEC+ had agreed in April this year that they would cut supply by 9.7 million barrels per day (bpd) during May-June to prop up prices that collapsed due to the coronavirus crisis. Those cuts were initially due to taper to 7.7 million bpd from July to December, however OPEC+ has extended such record production cuts until the end of July.

For the region, the recovery in oil prices and further extension of record production is expected to have positive impact on domestic markets as investors are expecting quick recovery in demand following the reopening of different sectors of the economy and anticipated improvement in business activity and rebound in profitability later this year once the impact of the coronavirus pandemic has hopefully subsided.

This cautious optimism is reflected in upturns in regional markets which also reflect positive developments in the region to contain the coronavirus outbreak. Market capitalisation of the Dubai and Abu Dhabi bourses increased by Dhs10.17bn and Dhs11.45bn, respectively.

It is in our view encouraging that OPEC+’s joint ministerial monitoring committee, JMMC, is to meet every month until December to review the market, ensure compliance and recommend appropriate levels of cuts. With the next JMMC meeting scheduled imminently for June 18, related announcements will be monitored with interest.

2. How will the pandemic impact the renewable sector in the region?
The energy sector is one that is heavily affected by the impact of the pandemic.

The ongoing Covid-19 crisis is resulting in the largest drop in global energy investment in history, according to the International Energy Agency. The lockdown has resulted in supply chain disruptions, unavailability of manpower, and issues in project financing, which ultimately impact energy projects.

Countries in the Middle East and elsewhere heavily rely on China, which supplies more than 50 per cent of the renewable energy equipment to the world. As an example, most major producers of renewable solar equipment are based in China. This crisis has resulted in a major disruption in the global supply chain network across various sectors including the renewable energy sector.

Delays in deliveries of materials has an impact on project timelines and completions. Employee safety is also a major concern. The International Monetary Fund (IMF) recently announced that it expects the pandemic to push the global economy into a recession potentially more severe than the financial crisis in 2008. The Solar Energy Industries Association (SEIA) predicts that the solar sector could lose up to 120,000 of its nearly 250,000 jobs – approximately half of its workforce – in the face of this crisis. In the renewable sector, this may have long-term sustainability implications. However, it is encouraging that in the UAE, to date, the government has taken strong decisions to mitigate any impact and support the economy, and this was done in a controlled manner.

3. Will the cost of installing renewables fall further?
Renewable energy costs continue to fall and renewable power generation is increasingly becoming the default source of least cost new power generation. Renewable power generation technologies are not just competing head-to-head with fossil fuel options without financial support, but increasingly undercutting them, in many cases by a substantial margin.

Newly installed renewable power capacity increasingly costs less than the cheapest power generation options based on fossil fuels, as was confirmed by the comprehensive study from the International Renewable Energy Agency (IRENA). More than half of the renewable capacity added in 2019 achieved lower electricity costs than new coal.

New solar and wind projects are undercutting the cheapest of existing coal-fired plants, the report finds.

Solar and wind power costs have continued to fall, complementing the more mature bioenergy, geothermal and hydropower technologies. Solar photovoltaics (PV) shows the sharpest cost decline over 2010-2019 at 82 per cent, followed by concentrating solar power (CSP) at 47 per cent, onshore wind at 40 per cent and offshore wind at 29 per cent.

Electricity costs from utility-scale solar PV fell 13 per cent year-on-year, reaching nearly seven cents ($0.068) per kilowatt-hour (kWh) in 2019.

Onshore and offshore wind both fell about 9 per cent year-on-year, reaching $0.053/kWh and $0.115/kWh, respectively, for newly commissioned projects.

Costs for CSP, still the least-developed among solar and wind technologies, fell 1 per cent to $0.182/kWh. A world record low tariff was submitted in April 2020 for the planned 2GW Al-Dhafra PV solar IPP in Abu Dhabi.

4. When are oil prices expected to stabilise?
While oil prices have partially recovered recently, they are still well below historic levels and remain challenging for producers in light of production costs. Benchmark Brent crude climbed to a three-month high on Friday above $42 a barrel, after diving below $20 in April. However, prices still remain a third lower than at the end of 2019. As global lockdown restrictions are being eased, oil demand is expected to exceed supply sometime in July but OPEC has yet to clear one billion barrels of excess oil inventories accumulated since March.

As a result, analysts predict that the recent market rally could continue as oil price is expected to stay above $40 a barrel in the coming weeks, which will help the local markets to remain steady and move upward.

5. What is the outlook for the energy sector for the second half of 2020?
Reduced economic activity related to the pandemic has caused changes in energy supply and demand patterns in 2020, particularly for petroleum and other liquid fuels. Uncertainties persist across outlook for other energy sources, including natural gas, electricity, coal, and renewables. However, the outlook is encouraging overall, as regional governments appear resolute in their commitment to ambitious clean energy goals.

As the impact of the pandemic gradually lessens, it is hoped that stability and confidence in this sector will continue to grow.