Since the Great Depression of the 1930s, no other event in recent history – not even the fairly recent global economic meltdown – has caused such a monumental economic cataclysm in the world within a very short period like the coronavirus pandemic. The downward spiral was unprecedented in speed and magnitude.The pandemic caused such political and economic disruptions that it has become an important history marker, bringing the world to accept certain behavioral or social changes and to adjust to a new lifestyle popularly referred to as the new normal.
Countries all over the world put in place confinement measures with the hope of curbing or stemming the spread of the virus. But the confinement measures brought immeasurable downturn effects on the world economy as the lockdown resulted in a crash in oil demand. It is obvious that oil occupies a central place in the economy of the world, and economic growth has a strong correlation with oil demand. As such, when the lockdown began to take its toll on the Oil and Gas sector, it naturally reverberated on the economy.
The Great Lockdown kept millions of people away from work and business, except for services that were considered essential. Consequently, some of the oil corporations had to partially shut down operations or reduce the concentration of their workforce in keeping with the containment measures. But the lockdown also resulted in falling demand for oil as all forms of travel were restricted and other high-volume users of oil and gas went into confinement. That simple principle of economics consequently came to play: the lower the demand, the lower the supply. And that means, the lower the production too. But the disagreement between leading oil producing countries (particularly Saudi Arabia and Russia) led to a steady supply in the midst of crumbling demand, thereby over flooding the market with supply. This was the initial cause of the downward turn of prices. With the full implementation of lockdown measures in many countries of the world, oil prices further plummeted toa historic low. Froman average of about $64/bbl in 2019, Brent crude prices nosedived to about $30/bbl in March and $25 in April 2020. This meant that producers literally wanted buyers to just take the product off their hands. In December 2019, OPEC’s Monthly Oil Market Report (MOMR) had projected that the world oil demand for 2020 would increase by1.08mb/d. But instead of an increase, there was a whopping decrease of 9.5mb/d in their October 2020 report. The monumental reduction in demand, inevitably led OPEC and its allies, in the Declaration of Cooperation convened in April, to propose production cuts. Those present at the meeting agreed to reduce their overall crude production by 9.7mb/d, this was to be further adjusted over the months in order to achieve a stable oil market.
Africa appeared to have been less hit by the ravages of the disease on humans, yet in terms of economic impact, it was hard hit.Africa being generally a developing continent, such a great destabilisation in the oil sector meant huge economic losses.For African oil exporting countries like Algeria, Angola, DR Congo, Equatorial Guinea, Gabon and Nigeria, the estimated 10percent fall in global demand meant their crude export would equally drop by an average of 10percent, which is the biggest fall in history, significantly impacting the economy.
The Oil and Gas industry in Africa, like anywhere else in the world, had a distressing time while the confinement measures lasted as they made great losses. Therefore, spending cuts and austerity measures had to be applied to balance the effect. Global upstream development expenditure went down by 30percent. Thus, Rystad Energy, a consultancy firm, reported that there could be $100billion cut in the budget of Exploration and Production companies, and the reduction may even go further in 2021.Africa’s Upstream spend in 2020, according to research and consultancy group, Wood Mackenzie, is down by $14 billion. This has greatly impacted the livelihood of millions of people who earn a living from the industry’s extensive value chain.
The compulsory spend cuts also mean a reduction or delay in funding of both social and investment projects. The economic disruptions did not only delay future investments in Africa; it equally made several oil companies to delay their Final Investment Decisions (FIDs) in the continent over the next few years.Wood Mackenzie reports that 22 FIDs targeted for a period of 18 months have gone down to 3, and “upstream value in Africa is down one-third.” Oil companies, likewise, have had to cut down their capital expenses.Thus, in the heat of the pandemic and oil crash, Chevron told Reuters that the company was “reviewing alternatives to reduce capital expenditures that are expected to lower short-term production and preserve long-term value.” BP and ExxonMobil in the same vein said they would reduce capital and operational spending. Similarly, Total S.A. announced a reduction in theirorganic capital expenditure by more than $3billion.
With the easing of movement restrictions, the Oil and Gas industry is gradually rebounding. Although there are fears that a second wave of the pandemic might cause the little gains being made to decline again, there are great prospects that the Oil and Gas industry will still make many gains as world economies reopen fully, since no alternative is yet found to upstage its central position in the world economy. Evidently, it is going to take a long time before that stability is gained but with the cooperation taking place among all the stakeholders in the industry, there is hope that the nightmare would be overcome.
Ayoo, a versatile drilling engineer with 18 years of professional experience, has played leading and critical roles in major oil and gas projects, locally and internationally.
