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How COVID-19 is impacting the energy industry

As the coronavirus, also known as COVID-19, started to spread globally, it didn’t only affect public health, but it also disrupted the economy, hitting very hard the energy industry. While governments from all over the world started to lockdown their countries, oil prices fell dramatically and many companies started to report major losses.

According to the Executive Director of the International Energy Agency (IEA), Fatih Birol and the Secretary General of the Organisation of the Petroleum Exporting Countries (OPEC), Mohammad Sanusi Barkindo, the biggest impact will be for citizens of those countries that rely heavily on income from oil and gas production.

“If current market conditions continue, their income from oil and gas will fall by 50 per cent to 85 per cent in 2020, reaching the lowest levels in more than two decades,” they noted. “This is likely to have major social and economic consequences, notably for public sector spending in vital areas such as healthcare and education.”

Besides, consequentially to the coronavirus pandemic, a price war has erupted between Russia and Saudi Arabia. In fact, OPEC had proposed restricting oil production in an effort to stabilise prices but Russia, which is the world’s third-biggest oil producer, rejected the plan, saying it wanted to assess the full impact of the virus on-demand before taking action. Saudi Arabia, the world’s second-largest oil producer, cut the price of its oil anyway bringing the alliance to a possible end.

The 2008 financial crisis echoes

At the end of March, 195 countries were affected by the coronavirus and more than 44 have declared a complete lockdown and closed most of the businesses.

Sarah Emerson, Senior Associate at the Energy Security and Climate Change Program of the Centre for Strategic and International Studies (CSIS), compared this situation to the SARS experience of 2003 and the financial crisis of 2008.

“SARS hit demand hard in the second quarter of 2003, but as the spread of the virus was brought under control, demand bounced back with a vengeance,” she recalled. “As soon as COVID-19’s spread is brought under control in the new countries where it is breaking out, pent up demand should bounce back later this year. That is the most important factor in a scenario where global oil demand does not contract this year. But if COVID-19 is more of a structural economic blow given its impact on the supply chain, international travel, and Chinese growth, then one begins to think of 2008, when oil demand did not recover until the next year. It is likely that COVID-19 will end up somewhere in between the two.”

The same concern was expressed by the president of the European Central Bank Christine Lagarde, worried about how the coronavirus outbreak could spark an economic downturn in Europe similar to the 2008 financial crash.

“In the beginning, many people and especially the banks thought that this will look more like the 9/11 as a shock, but this situation looks more like the 2008 financial crisis,” Rystad Energy’s Senior Oil Markets analyst Paola Rodriguez-Masiu tells CEENERGYNEWS. “Although the crisis is not created by structural problems like it was in 2008, it would be just as long-lasting and with repercussions of a similar magnitude. At Rystad we are forecasting that the pandemic is likely to impact the world for the entire 2020, and for some countries, it could even last up to 22 months. It is more than a shock as initially believed.”

For Christof Rühl, Senior Research Scholar at the Centre on Global Energy Policy supported by Columbia University, although countries need to protect the people, the economy cannot stand a complete lockdown for more than four to five months.

“This situation is different from the 2008 crisis,” he tells CEENERGYNEWS. “We don’t have much experience, but while 2008 was more about a brief interruption, now we are talking about the population at large.”

Countries that strictly lock down cities, may be more successful in delaying the spread of the virus, but such quarantines will also make the negative economic effects last longer.

Central and Eastern Europe is taking a very cautious approach to the virus and many governments are announcing massive fiscal packages. Also, the banking situation is different from 2008 and CEE banks are currently more resilient which means that they could better respond to the crisis.

Shortage of storage and boom of coal

The spread of the virus is also behind two other major challenges: a growing shortage of crude storage and a revival of coal, despite every countries’ commitments to fighting climate change.

The world currently has in storage around 7.2 billion barrels of crude and products onshore, including 1.3 billion barrels currently onboard oil tankers at sea. This will translate into a shortage of storage worldwide, as about 76 per cent of the world’s oil storage capacity is already full. Tankers’ renting prices are therefore skyrocketing adding another obstacle to a situation already on the bubble.

“Right now, the price structure is in the deepest contango since 2008, thus participants in this market are encouraged to store crude,” adds Mrs Rodriguez-Masiu. “But given the magnitude of the oversupply, we find that the storage capacity available won’t be enough. The oil demand will fall by almost 11 million barrels per day in April 2020, at the same time, OPEC+ countries could add an extra 2.5 million barrels per day of supply.” 

Oil prices have no option than to keep falling to encourage production shutdowns and bring to oversupply to a level that is sustainable for the available storage infrastructure.

Also, the one energy source that hasn’t blinked is coal, a fuel that may come out stronger through the current crisis, thus decelerating the energy transition.

Within CEE, Poland relies on coal for 80 per cent of its electricity. In 2019, when the European Commission unveiled the European Green Deal, Poland was the only EU nation that didn’t commit immediately to the bloc’s target of net-zero greenhouse gas (GHG) emissions by 2050. Now, both Poland and the Czech Republic are urging the EU to focus entirely on containing the epidemic crisis. So, while the EU Member States expected Poland to fully commit to the EU Green Deal by June, the coronavirus could further delay such hopes.

The impact on the gas industry

Other than coal, the CEE region is heavily reliant on gas. With most of the people confined in their homes, IEA’s director Mr Birol noted how the huge disruption caused by the coronavirus crisis has highlighted modern societies need of electricity. Electricity that, although new forms of short-term flexibility such as battery storage are on the rise, relies on natural gas power plants, this underlining the critical role of gas in clean energy transitions.

From the perspective of the market, Europe is a consumer market nor a producer, importing a lot of its gas requirements from Russia, so one could argue that the drop in oil and gas prices is a good thing as they are going to be lower for the consumers.

Paola Rodriguez-Masiu

“On the other hand, the lockdown to manage the COVID-19 crisis is forecasted to reduce more than five per cent of the total gas demand in Europe, notably due to reduced industrial activity and in power generation,” she added.

However, Mr Rühl makes a difference between economies relatively more isolated, like Ukraine, and more integrated ones, like Slovakia.

“Export-oriented economies will suffer more, of course,” he explains. “Ukraine is a good example of a country which, after all, will suffer much less. But also let’s consider that Central and Eastern Europe has done quite well over the last three years, especially in terms of economic growth.”

So, although the coronavirus is turning into an unprecedented international crisis, the negative effects are likely to be temporary. Meanwhile, as reminded by Mr Birol, the threat posed by climate change remain and governments must not lose sight of a major challenge of our time: clean energy transitions.

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