The Impact of COVID-19 on the Energy Industry
The COVID-19 outbreak has caused a global social and economic crisis over the past few months. It has not only affected how businesses operate and how people travel but also the energy sector. For instance, the coronavirus outbreak has shattered oil demand and sunk prices, posing a massive risk on industries involved in oil processing and extraction.
A while ago, Rystad Energy predicted a $30billion decline in gas and oil investments in 2020. And, this is already happening as oil prices in the US turn negative. The COVID-19 pandemic poses a significant threat to the energy industry because it interferes with many vital processes, e.g.:
Quarantines and travel bans inhibit the ability of companies to travel and conduct meetings
Offshore workers maintaining social distance while working and living in confined spaces
The prices of oil are at an all-time low with one barrel of oil going for $20 from $ 64.58 in January. Unfortunately, since people aren’t traveling as much, these prices will go lower if there is no solution to COVID-19.
With the oil industry collapse, energy industries in the future will be affected significantly in the following ways.
1. Delay in the construction of energy facilities
Before the outbreak, some energy companies were constructing new projects for oil production and manufacturing. However, energy companies have had to put a stop to their developments to stop the spread of the coronavirus.
This will result in delays as most companies will be unable to meet set deadlines. Furthermore, companies abroad that supply equipment essential for the development of the energy industry are also facing importation challenges. Hence, the reduction in delivery volumes further affects how energy companies will continue with their construction projects.
The sunken prices and low demand has decreased the value of several energy companies such as Marathon Oil, Noble Energy, Occidental, and Halliburton. In the future, these companies may become bankrupt because they will have problems restructuring prices since they don’t know what price oil or gas will be.
Energy companies that are vulnerable to bankruptcy are those that accrued too much debt and those that can’t generate workflow to make interest payments. Even if the pandemic comes to an end, it will take some time for the market to gain traction and for energy companies to get back on their feet.
The COVID-19 pandemic is affecting the volume of activity in the market since many people aren’t making payments, buying or selling stuff, or using as much money as they would. This, in turn, is affecting the liquidity and cash flow in the energy sector.
As companies continue to waive interest and provide loans to consumers, energy companies will have a difficult time getting the required finance and support. For instance, debt holders who would normally swap their debt for equity will no longer want the equity.
4. Lucrative business opportunities
As mentioned earlier, the oil crash is causing companies to lose almost two-thirds of their value, with ExxonMobil being down 38%. This nightmare presents lucrative buying opportunities for some of the energy industry’s biggest players. This is because struggling companies that are bankrupt or have inconsistent cash flow will have to sell cheaply.
5. Price war
Saudi Arabia is one of the leading exporters of oil globally, and they have declared a price war to combat the oil collapse. They want to increase the number of supplies from 2.1 million barrels a day to 3.6 million barrels throughout the year. Unfortunately, this price war is not a recipe for oil stability in the face of low demand. Instead, the energy industry will lose money regardless of the market share.
While consumers will get some relief in the form of lower oil prices, the energy industry will face dislocation in its economy.
The full range of COVID-19 consequences is yet to be relieved, but its impact on the energy industry is clear as prices plummet and demand decreases.