GAYA: To survive fuel price fall, oil firms put projects on hold

Tuesday May 5 2020

GAYA

Petroleum expert Mahaman Laouan Gaya. PHOTO | COURTESY 

By The EastAfrican

Mahaman Laouan Gaya is the former minister and ex-Secretary General of the African Petroleum Producers’ Organisation and expert in petroleum economics.

What is the genesis of the current oil crisis?

Last year, the US said it would produce more oil in 2020. Given that world stocks were likely to experience a record increase, OPEC+ reduced its production by 500,000 barrels per day, in addition

to the cut of 1.2 million barrels per day already agreed on in December 2018. This agreement would be valid at least until March 31, 2020.

But on the sidelines of these meetings, Russia said it could no longer make sacrifices to reduce its production, while the main beneficiary was the US.

Indeed, the US was waiting for other countries to cut their production and oil prices to go up so that they could take advantage of the situation. At the OPEC+ meeting on March 6, 2020, Russia refused to cut production further, and Saudi Arabia said it would flood the world with almost three million barrels per day and lower the price for its traditional customers.

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What is your reading of the oil industry at this time when prices are extremely low, and the sector is also impacted by the global Covid-19 pandemic?

The pandemic has sent the Chinese economy into a spin and by extension, the world economy.

China, the world’s largest importer and second largest consumer of crude oil after the US, has put on hold all its economic activities, which has affected its trading partners, mainly major European economies.

At the beginning of the pandemic, several airlines and shipping companies suspended contact with China. Later China shut out the world, and the world shut out other countries.

In just one month, more than 3.5 billion people found themselves in confinement with minimal travelling either by private cars, buses, planes, trains or boats, resulting in low consumption of fuel.

What’s the impact of the slowdown?

Between the collapse of oil prices and stock markets in the US, the reduction in world trade and low demand, the world is faced with a "perfect storm".

Some $9,000 billion worth of market valuation was lost in nine days at the beginning of March because of the pandemic. During the financial crisis of 2008 and that of sovereign debt in 2011, the Eurozone paid dearly for hesitating to intervene. Now, the coronavirus crisis is linked with cessation of industrial and transport activities has caused a drop in demand for oil by more than 15 per cent, yet production is not dropping.

Despite their differences, the 13 OPEC members and 10 allies (OPEC+) held negotiations on April 9 and April 12, and came up with a reduction agreement of 9.7 million barrels per day (Mb/d) from May 1 to June 30, 2020.

The reduction will then go to 8Mb/d for the next six months of this year, then to 6Mb/d from January 2021 to April 2022 to avoid a “collective suicide”.

The 9.7Mb/d represents a reduction in supply of 10 per cent, which, for the moment, is a breath of fresh air for the oil markets.

How do countries and companies investing in oil infrastructure navigate the economics of such projects amid the collapse of oil prices?

To survive, oil companies, big and small, will no longer prospect; which will result in a significant drop in investment this year. The urgency at the moment is the preservation of their capital and the many investment projects will unfortunately be essentially sacrificed.

The pressure on profits will force them to delay the start of all their projects and even to cancel certain contracts. For example, around the world, 28 Floating Production Storage and Off-loading (FPSO) units are under construction.

Fifteen FPSO units are under development in China, seven in South Korea and Singapore, while the rest is shared between other regions of the world. FPSO are efficient for the production, processing, storage and unloading of oil and gas produced at sea.

If the current situation persists, the delivery times of these projects could be pushed back by nine months to a year.

Recently, the super-majors — BP, Exxon Mobil, Royal Dutch Shell and French Total — announced plans to save money and cut investment.

In Africa, the situation is not any better since, in the face of the collapse of oil prices and the coronavirus pandemic, the upstream of the oil sector should reduce its investment expenditure by approximately 33 per cent this year, according to a study by market analyst Wood Mackenzie.

What about Uganda, which has several times pushed back its timelines for first oil?

The petroleum industry being capital intensive and presenting many risks, a country, just like the companies, should not embark on a venture without much interest for its economy.

If Uganda delays production in light of current oil prices, it will do so in concert with investors. My wish is to see Uganda set up good governance of its hydrocarbon resources.

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BIO

Training: Azerbaijan Petroleum and Chemical Institute. Holds an MBA in Business Management and certificates of Energy Economics and Politics of International Petroleum Management.

Professional career: Secretary general of African Petroleum Producers’ Organisation from 2015 to 2020; International Energy Expert at Burundi Office of UNDP 2014-2015; Member of the Association of International Petroleum Negotiators.

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