COVID-19 and Falling Oil Prices Roil Oil and Gas Sector
Construction Projects Delayed
Lower demand for oil as a result of the new coronavirus, in addition to the Russian-Saudi price war, is already leading to work stoppages, furloughs and spending cuts at energy companies, particularly oil and gas producers in the Marcellus and Permian shale plays. Analysts say the problems could lead to longer completion times for downstream construction projects that have halted, even temporarily.
David Braziel, president of RBN Energy, a Houston-based energy consultant, says, “The major slowdown in economic activity associated with COVID-19 –– and the sharp decline in the stock market –– will result in a stretching out in the construction timelines for some pipeline and petrochemical projects.”
The American Petroleum Institute’s chief economist, Dan Foreman, said in a statement, “The demand destruction resulting from the coronavirus combined with Saudi Arabia and Russia’s increasing supply has left global energy markets in unchartered territory.
On March 23, Shell Oil announced plans to slash operating costs by $3 billion to $4 billion over the next 12 months, and to reduce spending to $20 billion or below, from a planned level of $25 billion. On March 18, the Dutch-owned company said it would temporarily halt work on a petrochemical cracker plant being built near Pittsburgh in an effort to comply with the Centers for Disease Control’s recommendations related to the coronavirus. Work on the plant, under construction since late 2017, is expected to resume, however, when quarantines and other precautionary safety measures are lifted.
Additionally, two gas power plant projects have also at least temporarily halted work, according to a North American Building Trades Unions spokeswoman. “We have advocated to ensure projects will not be cancelled, and most states have deemed construction essential.” That designation is important, she says, to ensure that workers are able to maintain “middle-class” wages and benefits.
EnLink Midstream LLC, a Dallas-based energy company, said March 17 it plans to reduce capital expenditures related to well connections and associated gathering infrastructure, and is deferring several growth projects in 2020 as a direct result of the “current oil price environment.”
Halliburton announced on March 18 that it would furlough 3,500 workers from its Texas oilfields for as long as 60 days.
Normally, when there is a surplus of oil in the market, demand picks up due to lower costs. But increasing numbers of people are choosing or being told to stay at home or shelter in place, which keeps demand low, said Amy Myers Jaffe, director of the program on energy security and climate change at the Council on Foreign Relations, in a March 17 podcast. If the crisis is short-lived, things will likely get back to normal, she said. However, “if this turns out to be a prolonged financial crisis, and the oil price stays low, then I think we’re going to see some systemic problems, especially in the United States, that probably need to be addressed now—sooner rather than later,” she said.
The Dept. of Energy’s recent announcement that it planned to purchase 30 million barrels of oil for the Strategic Petroleum Reserve (SPR) helped crude rebound to above $23 per barrel as of March 23, from its low price of $19 per barrel.
RBN’s Braziel adds the Trump administration’s decision to purchase oil for the SPR won’t have much of an effect in the near term. It can take as much as four days to add 1 million barrels, he says, and adding 30 million barrels or more “would take at least a few months. The global market could change a lot over that time period.” But if the coronavirus recedes and quarantines are lifted, “oil prices and the industry will benefit.”