Covid-19 in oil and gas: two years on
It’s been two years since the pandemic began, with nations around the world coming to grips with its ripple effects and damages. Scarlett Evans investigates how oil and gas is faring.
Last year, we looked at the state of the oil and gas industry as operations began to recover from the pandemic and industries slowly returned to business-as-usual.
While some sectors seemed to get back on track relatively smoothly one year on from the pandemic’s beginning, GlobalData insights showed offshore to be a relative laggard in returning to pre-pandemic production and investment levels, with the oil and gas sector ranking last of the 18 sectors considered in terms of latest value for Covid-19 activity recovery.
With the sector already facing existential challenges ahead of the pandemic, how has the industry bounced back two years on from the initial outbreak?
A sector slow to change
As nations change tack to live with rather than fight against the virus, certain sectors are returning to pre-pandemic activity levels as business resumes. This trend, however, has not been reflected in the offshore industry.
According to GloabalData figures from the beginning of last year, the oil and gas sector was the worst performer in the global economy, with sectoral activity still below pre-pandemic levels in the first quarter of 2021. This definition of sectoral activity was assessed using a number of different datasets from the sectors considered, including job advertisements, deals and stock prices.
As shown below, at the start of the pandemic in March 2020, stocks in oil and gas took a nosedive that the sector has struggled to recover from. Sectors were assessed on the average of companies’ stock prices in each sector in dollars; offshore stocks hit a low of $69.85 in March 2020, before sporadically rising to a high of $143.31 in May 2021.
While the other energy sectors of power and mining similarly saw a significant decline as a result of the pandemic, neither reached the lows of offshore. The power sector, which overtook offshore at the end of 2019, has somewhat recovered from its wobble at the height of the pandemic, reaching an average of $162.17 in May 2021. Mining has been the primary winner within energy, with stocks skyrocketing between January 2020 and January 2021, reaching $444.28 as of May 2021.
Declining interest in the offshore sector is similarly seen in the dwindling number of financial deals in the sector, which continued to dip throughout the pandemic and, as of July 2021, reached below pre-pandemic levels. This placed the offshore sector 11th out of the 18 industries analysed over this period of time.
Financial strain from the pandemic and hesitation from businesses to completely open their doors again has meant that financial deals and investment have been dampened across sectors. However, oil and gas has been set on a particular path of decline as nations seek to phase it out in the post-pandemic landscape.
The environmental agenda
The change in investor interest is partially due to the fact that, as nations rebuild their economies after the shockwaves of the pandemic, traditional energy sources are being sidelined in favour of cleaner alternatives. With sustainable energy use increasing during the global lockdowns, many governments made it a cornerstone of their recovery packages.
As appears in the GlobalData report ‘Covid-19 cross-sector impact’, there has been a shift in focus to sustainable growth, with the World Economic Forum saying that “any pandemic response needs to be seen in the context of a worsening climate crisis”.
This push to move into renewables is making offshore recovery difficult, with companies looking to restructure with clean energies at the centre of their business models, something that can be seen in hiring trends across the offshore sector. Environmental jobs within offshore have seen a steady rise throughout 2021, reaching a new high of 12% of all positions posted within the sector in December that year.
Given the increased investor and public pressure to turn away from heavy emitting industries such as oil and gas, it is likely that offshore majors will use their substantial financial power to develop renewables or other clean energy technologies such as carbon capture or green hydrogen. In doing so, they would open up the option to adapt to this changing energy landscape, and avoid being left behind by the global shift away from fossil fuels.
Growth on the horizon?
The green agenda, in addition to ongoing market vulnerability, means there are overall weaker forecasts for oil demand. According to S&P Global Platts Analytics’ ‘Future Energy Outlooks’, the pandemic’s impact on global economies and consumer behaviour has reduced long-term world oil demand by 2.5 million barrels per day. The analytics group has also predicted overall oil consumption will not return to pre-Covid-19 levels until late 2022.
“Such forecasts have many OPEC+ members worried about a renewed slump in prices that would undo the hard-won gains of the last several months and destabilise their economies just as they are regaining their footing,” the group writes.
The squeeze on oil producers has already pushed prices up, even before Russia’s invasion of Ukraine sent the energy markets into further disarray.
The conflict has disrupted the offshore industry’s recovery process, with the retaliatory sanctions levelled against Russia meaning that supplies of oil and gas from the nation are no longer accepted by many Western nations, and oil and gas majors have retreated from operations in the region.
While it may take some time for the sector to stabilise, recovery is still expected to happen in the future, and it is not all bad news for the industry. According to GlobalData’s 'Global Capacity and Capital Expenditure Outlook for Refineries, 2022–2026', global crude distillation unit (CDU) capacity is expected to witness a growth of 11% over the next four years, increasing from 105.6 million barrels per day (mmbd) in 2022 to 117.2mmbd by 2026.
Asia is set to lead the charge, expected to see the highest CDU capacity among all global regions and reach 42.2mmbd in 2026. Specifically, China, India and Nigeria are set to be the top three countries globally for CDU capacity additions during the 2022 to 2026 outlook period. China is expected to add 3.4mmbd of CDU capacity by 2026, while India and Nigeria are expected to add 1.6mmbd and 1.5mmbd respectively.
While the unfolding war in Ukraine will likely alter the parameters and details of its development – placing different nations at the forefront (or back) of production – the sector is expected to regain momentum, even if it is with a more eco-minded slant moving forwards. Despite the obstacles slowing the offshore sector’s recovery from the pandemic, the industry will, to some degree, pick up again and oil and gas will remain a crucial part of the energy landscape for some time yet.
Main image: Refinery industry engineer. Credit: Bannafarsai_Stock / Shutterstock.com
US and the Gulf of Mexico
The number of active drilling rigs in the lower 48 states of the US, excluding the Gulf of Mexico, stood at 753 in February. This fell to 738 in March, before reaching a four-year low of 572 in April, the lowest since May 2016. As of 8 May 2020, the Lower 48 land rig count reached 355 rigs, according to Baker Hughes’ data.
When it comes to the sought-after oil and gas fields in the Gulf of Mexico, production is estimated to remain relatively flat. The US Energy Information Administration (EIA) forecasts an average of 1.9 million bpd over 2020 and 2021, almost unchanged from its 2019 average.
The administration said that it does not expect any cancellations to Gulf of Mexico projects announced in 2020 and 2021.
Before the oil price crisis in the first half of 2020, Shell had awarded a contract to Sembcorp Marine for construction of the topsides and hull of a floating production unit for the Whale exploration project in the US Gulf of Mexico. Later this year, uncertain economic conditions forced Shell to postpone the project to 2021.
Regarding crude oil production in Alaska, the EIA predicted that it would remain relatively stable, at an average of 460,000 b/d in 2020, and that it will slightly rise in 2021.
Oil companies operating in Norway, Western Europe’s largest petroleum producer, drilled just 30 exploration wells off the coast of Norway by the end of 2020. This marked the lowest level in 14 years, as announced by the Norwegian Petroleum Directorate (NPD) in October.
The search for new oil and gas reserves has also decreased from 57 drilled wells in 2019 and falls behind previous projections of about 50 wells.
The NPD said in a statement: "The decline in demand for oil and lower prices have led oil companies to reduce their exploration budgets for the year and postpone a number of exploration wells.”
Companies including Equinor, Aker BP, and Lundin Energy announced considerable cost cuts in the early phases of the Covid-19 crisis, attempting to preserve capital and weather the storm.
In response, NPD director of exploration Torgeir Stordal expressed concerns over the near future of the industry: "Without new discoveries, oil and gas production could decline rapidly after 2030."
In the meantime, Norway still believes that there are significant resources to be found beneath its seabed, which are projected at around 3.9 billion cubic meters (bcm), a slight decrease from 4 bcm two years ago, the NPD said.
The Brazilian oil and gas industry has been deeply influenced by the unusual events of 2020.
In November 2019, Petrobras announced its 2020–24 investment plan, with a new budget of approximately $75.7bn (84.94% allocated to exploration and production). Despite the challenges, the company has not reported massive obstacles.
It also continued with its divestment programme of some upstream, midstream, and downstream assets, opening new opportunities for foreign investment.
During the Covid-19 outbreak, Petrobras and other oil companies shifted focus from their own projects onto divesting in ancillary projects, which helped reduce their expenses while generating income for the sale of such non-core assets.
November’s bidding rounds by the National Agency of Petroleum, Natural Gas and Biofuels (ANP), showed that the usual interest in Brazil’s offshore upstream rounds has plunged, which led to the suspension of the Brazil Round 17 for exploratory blocks under the concession regime.
Despite the hardships, the ANP managed to keep the First Cycle of the permanent offer, which involves a continuous offer of fields returned and exploratory blocks offered in previous tenders that were not acquired or returned to the agency.
The UK Continental Shelf
British consultancy Westwood Global estimated in September 2020 that the UK Continental Shelf (UKCS) was on course to reach a record low of offshore exploration wells this year, its lowest since companies started exploring the North Sea for oil in the 1960s.
In May 2020, along with the publication of its annual review of global exploration activity and outlook for 2020 and beyond, the consultancy said that while dealing with the immediate Covid-19 crisis, “societal pressure is building for a rapid transition to a low-carbon future”.
In September, Alyson Harding, technical manager at Westwood, said in Energy Voice that the company predicts only five exploration wells will be drilled in 2020, one less than in 2018. By comparison, 14 exploration wells were drilled last year with only one becoming commercial.
According to Westwood’s early estimations from February, the UKCS was predicted to reach 17 wells by the end of the year, but the pandemic hampered these plans. So far, Chrysaor’s and Apache’s Solar well and Total’s Isabella well are commercially viable.
While the Oil and Gas Authority offered 113 licence areas over 259 blocks or part-blocks to 65 companies in early September, it is not certain that operations will take advantage of this opportunity because of current market instability.
Looking ahead, Harding said in a company webinar that the firm has been given indications from companies that 23 exploration and 10 appraisals wells could be drilled in the UKCS next year, depending on the impact of Covid-19 in 2021.
Mozambique’s untapped oil and gas potential was first revealed by initial exploratory drilling in 2007.
Later, natural gas became part of Mozambique’s oil and gas strategy to help industrialise the northern provinces of the country. However, after some recent project cancellations, Mozambique’s Council of Ministers is now planning to transport the north’s oil and gas to the better developed south.
In a tender process run in 2017, Shell was given the right to build a gas-to-liquids plant that would convert gas to synthetic diesel, naphtha, and kerosene; Norwegian chemical company Yara International was allowed to build a fertiliser plant to power the northern town of Palma using domestic market gas; and Kenyan power company Great Lakes Africa Energy was allocated gas to build a 250MW power plant in the north-eastern city of Nacala.
However, whether influenced by the Covid-19 crisis or rising environmental scrutiny in the country, it appears that only the Nacala power plant will take place. Yara has cancelled its fertiliser project and Shell’s CEO has been giving indications that the company does not expect to develop any new greenfield gas-to-liquids projects.