March 2020 /// Vol 241 No. 3

Columns

Oil and gas in the capitals

Jeff Moore, Contributing Editor

Earlier this month, Rystad Energy said the Coronavirus (COVID-19) would cause staffing and supply shortages in the global oil and gas sector, triggering a loss of approximately $30 billion this year. Some of this negative impact is already occurring in Asia, the region hit hardest by the virus, so far. Here then, are eight COVID-19 oil-and-gas-related issues that World Oil identified as “watch items” for Asia in this highly fluid situation.

First, hydrocarbon cargo cancelations and diversions. These are happening already and have resulted from quarantines and staff shortages needed to offload hydrocarbon shipments. On Feb. 12, Qatar’s Ministry of Energy rescheduled or redirected gas and oil shipments to China, to help contain the situation. On Feb. 27, Indonesia’s oil and gas regulator, SKK Migas, said it had delayed three LNG shipments to Fujian province in China because of the virus.

Second, reduced hydrocarbon processing. As factories, particularly in China, continue to shut down to keep workers from spreading the virus, refineries might also reduce or halt production, which will, in turn, cause E&P facilities to do the same.

Third, the implementation of force majeures. Bloomberg reported on Feb. 7 that this had already happened in China. CNOOC, China’s largest LNG importer, declared a force majeure, telling several unnamed suppliers that it was going to cancel their deliveries scheduled for February and March. If the virus worsens, there might be a ripple effect to the E&P sector, where additional force majeures could occur.

Fourth, delayed or halted production on offshore platforms and FSOs, due to infected workers. While no energy companies have yet reported this has happened—and hopefully none will—the UK Oil and Gas Industry Association recently recommended 1) medical screening and then denying or delaying offshore access to anyone who has recently been to an at-risk COVID-19 country; and, 2) denying offshore access to anyone showing signs of the virus. Suspect countries in Asia include China (including Hong Kong), Thailand, Japan, South Korea, Taiwan, Singapore, Malaysia, Vietnam, Cambodia, Laos and Myanmar.

For offshore operations actually in these key impact countries, the impetus for screening is paramount. Not doing so could halt an entire E&P project. In early February, Abu Dhabi National Energy Company PJSC (TAQA) announced it had quarantined a worker on its Tern Alpha facility in the North Sea after showing minor symptoms associated with COVID-19 upon returning from a trip to Thailand. The Tern Alpha’s medic was tending to the patient, who was separated from the rest of the crew, while testing was ongoing.

Fifth, a significant drop in hydrocarbon demand because of industrial factory shutdowns. This has happened already. Wood Mackenzie, in early February, reported that in China, factory shutdowns had caused a demand loss of 2 Bcm of LNG, and it estimates this figure might increase to between 6 Bcm and 14 Bcm for the year. Warren Pies of Ned Davis Research, Inc., said China had reduced oil demand by 2-3 MMbpd, and that the virus will be a “black swan” scenario for global energy markets. This reduced demand will impact E&P activities in Asia and beyond.

Adding to this, BHP hypothesizes in a worst-case scenario that some types of hydrocarbon consumption might be lost permanently as a result of the virus spreading significantly.

Sixth, upstream and downstream project delays or shutdowns. Regarding downstream projects, Woodside says COVID-19-driven demand and lowered price issues, alone, have hurt its gargantuan Scarborough LNG project. Specifically, Woodside had aimed, in early 2020, to both sell a stake in this project and secure long-term sales contracts from Scarborough’s production, to raise money to help with ongoing construction costs. All that is in jeopardy now.

Regarding upstream projects, there have been no reported delays or shutdowns, but the TAQA case in the North Sea should serve as a warning. For example, Jadestone Energy is poised, as of March, to begin development of the Nam Du and U Minh offshore gas fields in Vietnam. Jadestone’s current plan, regarding transportation, installation work, and acquiring a drilling rig, is all scheduled to be secured by contract awards during second-quarter 2020. First gas at Nam Du and U Minh is scheduled for late 2021. A wider spreading of COVID-19 will likely impact such timelines. Likewise, Jadestone’s CAPEX for this and other near-term projects, which is in the $160-190-million range, would be impacted by a harder-hitting COVID-19.

Seventh, finding other buyers for canceled or diverted cargoes. This is in the planning phase, at least in Indonesia. SKK Migas says if shipments to certain countries were canceled, they would aim to sell to domestic customers. This would impact profits and timelines, as the price of hydrocarbons falls from lack of demand, and as delays occur, working out the price and storage for hydrocarbons by alternate customers.

Eighth, platform shortages. This is poised to happen in Asia, if COVID-19 intensifies. Rystad Energy hypothesizes that if the virus gets worse in Asia, then offshore rigs and FSO vessel production would be at risk. Rystad says out of 28 of these types of vessels that are under construction, 22 are being built in Singapore, China and South Korea.

The risks here are potentially massive, and the situation requires daily monitoring. Contingency plans regarding bad and worst-case scenarios need to be sketched out, regarding up and downstream operations, plus related financing and profit margin issues.

The Authors ///

Jeff Moore runs Muir Analytics, a risk consulting firm specializing in deciphering threats in conflict zones. He is author of the book, Spies for Nimitz, which depicts America’s first modern intelligence agency. He holds a PhD from the University of Exeter in the UK.

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