The global oil, gas and petrochemical industry is facing a perfect storm of low commodity prices and disruptions caused by the fight against the coronavirus. Within the Caribbean, these two factors have been intensified by the political uncertainty in the region’s newest and biggest oil producer, Guyana.
The global response to slow the spread of COVID-19, including lockdowns and the banning of most international air travel, has led to a massive decline in demand for energy products, in particular the petroleum products that dominate in the transport sector. This unprecedented fall-off in demand coincided with moves in March 2020 by some of the major oil and gas producers to increase supply in order to maintain market share. This perfect storm led to commodity prices hitting an 18-year low during March 2020. The subsequent agreement by the Organization of the Petroleum Exporting Countries (OPEC) members and other major oil producers, in particular Russia, in April 2020 to remove almost 10 million barrels of oil production from the market is unlikely to bolster prices, given the unprecedented fall in demand. Most analysts predict commodity prices will remain low for at least the next few months and probably longer.
For the Caribbean energy sector, this perfect storm has had a major impact on companies across the industry, both large and small. In Trinidad and Tobago, the region’s major hydrocarbon producer, natural gas is now much more important than oil production. Gas prices within Trinidad and Tobago are typically linked to the final commodity prices for petrochemicals as Mark Loquan, President of The National Gas Company of Trinidad and Tobago explained: ‘While we have seen global oil prices plummet over the past months, in Trinidad, gas prices remain consistent with our long-term contractual arrangements. Those contracts which are linked to petrochemical commodity prices will therefore fluctuate with the movement of those commodities’.
While global petrochemical prices do not necessarily always simply mirror oil prices, they do tend to be closely correlated and have fallen significantly in the past few months. While the published contract prices for methanol did not show the same decreases as oil prices, industry sources say that spot prices are very significantly down. The published benchmark price for naphtha (a feedstock for downstream petrochemicals that often competes with methanol) has seen an almost 70% decline since the start of the year.
Claire Fitzpatrick, Regional President of BPTT (the biggest hydrocarbon producer in the region), told EnergyNow that ‘in response [to the current situation], upstream operators are adjusting capital and operating expenditure budgets’. To date, there have been no announcements of cancellations of major upstream capital projects within the Caribbean, though Exxon has announced that its final investment decision on Payara project, the third phase of the massive Stabroek block development in Guyana, would be delayed, and this could lead to an overall 12-month delay in project delivery.
While there have not yet been major cancellations of upstream development projects and operators have continued to produce oil, gas and petrochemicals as part of the essential services in the region, companies have been significantly cutting back on activities in keeping with governments’ COVID-19 response plans and multinational companies’ global policies. Fitzpatrick explained:
‘For BPTT, our priority remains the safety of our people and our operations and we will continue to take all necessary measures to do our part to manage the spread of the virus. A key part of our response has been to limit operational and project activity in keeping with the guidelines issued by BP Group and the government. This has meant the reprioritisation of activity. In the first quarter, there were no production impacts as a result of our response to the COVID-19 virus and we will continue to monitor and adjust our operations to maintain operational stability’.
The response to the COVID-19 crisis has seen major scheduled maintenance projects being postponed until later in the year in order to minimise the risk of transmission of the virus on worksites. Within Trinidad, four major scheduled plant turnarounds have been postponed. This steep decline in activity has been a major strain on the energy service companies, contractors who support the industry and thousands of individual workers who are typically recruited to work on these projects.
Many energy service companies have barely recovered from the previous oil price crisis in 2014/15 when they saw their operating margins significantly cut. The offer by Trinidad and Tobago-based banks to defer loan repayments and restructure debt has offered some respite to some local service companies but they still face a difficult situation. Liquidity is a major issue for many of the companies in the service sector as they seek to preserve jobs while their revenue has plummeted. Measures introduced by some of the operators to significantly reduce payment terms have been welcomed by the service industry, for example, the commitment by BHP to reduce payment terms to seven days for small suppliers. The commitment by the government of Trinidad and Tobago to settle long outstanding debts and to make VAT refund payments to local companies is also welcomed, but these liquidity related measures are unlikely to be enough to fully preserve employment through the downturn.
To compound matters for the Trinidad and Tobago energy services sector, their access to regional export markets such as Guyana, Barbados or Suriname is now shut off, due to travel restrictions and closed borders. Energy service companies typically export services by assigning staff to work on projects in other countries, so travel restrictions make it impossible to work internationally. Within countries, COVID-19 restrictions have also often introduced additional costs on operations for energy service companies and productivity for manual workers has been lowered due to the challenges of maintaining social distancing and increased workplace hygiene.
Despite the perfect storm and the huge challenges being faced by the industry, leaders in the sector remain confident that we can overcome the challenges. ‘While the current environment is extremely challenging for all of us, we remain confident that we have worked through similar market conditions in the past. We know this calls for tough decisions, but we are committed to working with all our stakeholders so that we can get through this together’, Fitzpatrick told EnergyNow.