Coronavirus Upstream Impacts Via Oil Prices

(Global) Demand Risk Greater than Project Delays

The impact of coronavirus on the upstream oil and gas sector is likely to be greatest on demand and prices rather than project delays, according to research consultancy Wood Mackenzie.

While the firm acknowledges that manufacturing shutdowns and shipping bottlenecks are causing delays and disruption for operators worldwide the volumes at risk are seen as "not material" in global production terms.

“For most operators, even if delays stretch to six months, the greatest impact is prevailing oil and gas prices,” said Fraser McKay, Wood Mackenzie head of upstream analysis.

Sustained Price Drop

With breakbulk demand already hit by global trade tensions, further project delays are among the most immediate impacts for many operators. But Wood Mackenzie notes that only a small proportion of global supply comes from the worst-affected regions.

“A three-month delay at the Johan Castberg development, would dent NPV10 by less than 1 percent. The effect of a 5 percent increase in remaining CAPEX is approximately double that. However, a sustained Brent price drop of US$10/bbl means US$1 billion less cash flow per quarter for operator Equinor,” McKay commented.

1.5 Million Barrels Per Day at Risk
 With the World Health Organisation monitoring the outbreak closely to determine if it qualifies as a global pandemic, a scenario of accelerated international infection rates could mean the supply impact quickly becomes more severe.

“We estimate projects with peak capacity of 1.5 million barrels per day and nearly 4 bcfd are at risk of delay relative to our start-up estimates. A total of 2 million barrels per day and 6 bcfd is under construction across Southeast Asia,” McKay said.

The firm notes that if delays do occur for an average of three months this would only reduce 2022 production by 160,000 barrels per day, a "mere scratch on the surface" of global supply. But if control of the disease takes a turn for the worse, the "impact multiplies quickly."

In a scenario of accelerated international infection rates, Wood Mackenzie estimates that supply impact would quickly become more severe, and if ongoing virus containment efforts prove unsuccessful project delays will get much longer, having serious knock-on cost effects globally.