PERTH (miningweekly.com) – The Coronavirus, which has caused nearly 2 800 deaths world-wide, was likely to have a bigger impact on prevailing oil and gas prices than on project construction, industry analyst Wood Mackenzie (Woodmac) said on Thursday.
Manufacturing shutdowns and shipping bottlenecks were causing project delays, Woodmac said in a statement, noting that vessels and other large components being constructed in affected shipyards have the most obvious supply impact.
However, the volumes at risk were not material in global production terms.
Head of upstream analysis Fraser McKay said that for most operators, even if delays stretch to six months, the greatest impact would be on the prevailing oil and gas prices.
“A three-month delay at the Johan Castberg development, would dent net present values by less than 1%. The effect of a 5% increase in remaining capital expenditure is approximately double that. However, a sustained Brent price drop of $10/barrel means $1-billion less cash flow per quarter for operator Equinor.
“Using Woodmacs’ Lens Direct data, we calculate a $10/barrel change in price (the pull-back in Brent since January) has a $40-billion impact on global cash flow per quarter. For some companies, this could make the difference between increasing shareholder distributions or another year of negative cash flow.”
As there has been little effect on flowing supply so far, industry concern has instead focused on new builds, McKay said.
“We estimate projects with peak capacity of 1.5-million barrels a day and nearly 4-billion cubic feet per day (bcfd) are at risk of delay relative to our startup estimates. A total of two-million barrels a day and 6 bcfd is under construction across South East Asia.
“If delays do occur, an average of three months would only reduce 2022 production (the peak year of impact) by 160 000 bbl/d. 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, the supply impact would quickly become more severe. If ongoing virus containment efforts prove unsuccessful, production operations at more producing assets in South East Asia and beyond could be directly affected. Project delays would get longer, and further component inventory tightening would have knock-on cost effects globally, McKay said.
The epidemic will give producers and oilfield supply chain participants pause for thought, while post-epidemic data analysis will inform future hedging, procurement and risk mitigation strategies.
Globalised supply networks could be augmented with a resurgence in local manufacturing, said McKay, but he noted that to offset the increased cost, investment in technology-led regionalisation, would need to accelerate.