Impact of Covid-19 on the Oil and Gas Sector
Published on : Monday 08-06-2020
Khurshed R Printer presents a brief overview of the effect caused by Covid-19 on oil and gas production, pricing and global economy.
One of the linchpins of global economy is the petroleum industry, more specifically, oil. The appearance of Corona Virus in December 2019 in China and gradual expansion of the epidemic drastically brought down demand and hence, price of crude oil. On 31st December 2019, the day Covid-19 was first reported, WTI oil future was trading at US $61 and price dropped to $23 on 23 March 2020. West Texas Intermediate or WTI crude oil is a specific grade of crude oil and one of the main three benchmarks in oil pricing, along with Brent and Dubai Crude. More than 60% fall in the price of WTI crude sends a message of demand imbalance. Statics shows a $10 reduction in crude has a $40 billion impact on global cash flow per quarter.
The United States of America, the largest economy in the world and the biggest consumer of oil (20.46% of total world oil production), finds itself at the top of the table of most Covid-19 infected patients. China, the 2nd largest oil consumer (13.52%) seems to be on the path of recovery. India is the third largest consumer of the total world oil production at 5.16%. The aviation sector is the second major consumer of oil with nearly 11.0% share in total oil demand in the transportation sector. Global level travel bans along with grounding of international flights leads to heavy reduction in consumption of aviation turbine fuel (ATF) across the globe.
The top 22 oil consuming countries have a combined GDP of US$ 68 trillion and their contribution to the worlds GDP works out to 79%. This means restricted economic activities these countries will certainly lead to economic slowdown followed by severe global recession. It is very clear from the above data that Covid-19, this tiny virus has totally destroyed the global economy. This virus has forced companies to slow down or in some cases halt all physical operations. In the upstream sector, offshore oil production is being significantly affected due to the Corona Virus outbreak. The energy produced offshore is a key component for the supply of oil and natural gas globally. Governments across various countries are also supporting the plan to reduce offshore workers, which in turn, will negatively affect oil production capacity.
In India, all forms of public transport through rail, road and air have been suspended till 17 May 2020. Demand for fossil fuels except LPG and domestic natural gas is on the free fall. Consequent to the development, the refiners are forced to cut down their throughput to an extent of 25-30 per cent immediately. Oil importing nations may enjoy low oil price whereas the exporting nations will have to find their way to generate revenue from alternative mechanism. Covid-19 will seriously push oil industry to the Intensive Care Unit, where lack of ventilators will hurt the industry badly. During Covid-19 and beyond, policy makers must take care of oil industry as survival of oil industry holds the key to the revival of economies.
India’s offshore is state controlled under the flagship PSU, ONGC. The approximate cost per barrel for ONGC works out between US$ 35 and US $40. Shale gas (onshore) produced in the US has a very similar costing. The question that arises is whether we can stop the productions at this high cost in comparison to the market availability, buy at lower rates and store it for future use. Even though this is the logical approach, it’s very costly and technically a challenging task. The technology used for shale oil is very different and presently only practiced in the US. The wells drilled for shale oil have a very small flowing life of between 45 days to 90 days. Therefore to cap this oil is much easier as all that is required is to stop drilling new wells till the market value of oil rises sufficiently to make economic sense.
Offshore oil production is a different ball game altogether. The investments are many times more than for onshore. These wells have a life of 10 to 20 years and hence justify the expenditure. Mumbai offshore is the biggest producer of oil and gas in the country and has been in operation for over 45 years. These are now aging fields and are in their secondary stage of production. Capping production is not an option here because of technical complexities, too elaborate to mention here. It would however suffice to say that continuous running of equipment and monitoring in the harshest of offshore environment is mandatory. The only major advantage of continuing to produce at a higher cost in this era of low oil prices is saving of foreign exchange.
Oil storage is a hazardous and complex subject having very severe limitations. Tank farms are a common source of oil storage. These farms can store only a limited amount of oil depending on the size of the farm. Oil being a combustible liquid these farms need to be built in isolated areas with great emphasis on safety and fire protection. These installations come at a high Capex and Opex, besides transportation cost. The second option available is caverns in the earth crust. These are mostly rock/salt caves developed form the Earth crust. India is in the process of developing these caverns in Vishakhapatnam and Mangalore.
Offshore oil is mostly produced at well head platforms or WHPs, which are satellite platforms in shallow water (50 to 60 metres depth). These WHPs are unmanned and connected to the main process platform by subsea pipelines where oil, water and gas are separated and transported to land for further processing and sale. The WHPs and process platforms are highly automated and need to be seen to be believed. State-of-the-art process automation is a necessity here considering the complexity of operations in a hazardous and harsh environment with bare minimum manpower of approximately 150 personnel per Process Complex at any given time.
In the present scenario of low oil prices certain automation issues need improvement and probably some new technology to bring down the cost of production. Firstly the WHPs are powered by solar panels that can produce at best 500 Watts. This is one of the main constraints for increasing automation. Up gradation in instrumentation and automation of these platforms using subsea power transmission, fibre communication and very low power long life battery operated instrumentation is the need of the hour. The criterion for upstream oil production in offshore is reliability even if that means sacrificing accuracy to some extent. We have spoken for ‘Make in India’ for a very long time now, if our offshore has to survive this crisis of low oil prices then local operators/manufacturers who are ready to take up the challenge must be encouraged. Imports of those items manufactured locally and tested in offshore should be banned or taxed.
ONGC’s biggest asset though is its male and female engineering manpower. Highly qualified, skilled, knowledgeable and above all patriotic engineers unmatched in the global oil industry. True oil soldiers of our country. The recent sudden lockdown has proved this beyond doubt. Most of these dedicated soldiers have continued to work with complete dedication for more than 60 days at a stretch (normal duty is 14 days on/off cycle). Many have not been able to attend the last rites of their loved ones. I am confident that they will survive this period too. I salute these true oil soldiers and their families through this article and request all those reading it to salute and pray for them.
Long live ONGC – the shining star of our country’s economy!
Khurshed R Printer, Managing Director, Fusion Technologies, a startup for offshore Oil and Gas instrumentation. Mr Printer superannuated as Chief Engineer from ONGC, India’s most valued public sector enterprise, in October2014. He has an envious and unparalleled experience of thirty years in the upstream oil and gas industry. His experience spans Rig Electricals, Offshore Instrumentation and oil field Project Management.