Covid-19 and the Gulf energy sector: business as usual?

GCCEnergy

Economic News

29 Jun 2020
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The Covid-19 pandemic has proved a unique challenge for the global economy, and in particular the energy industry, which has witnessed a severe fall in demand in response to lockdown measures around the world. Despite this, major developments in the Gulf suggest that players are pursuing a business-as-usual attitude as they push ahead with major investment plans.

On Tuesday Abu Dhabi National Oil Company (ADNOC), the state-owned oil company, announced that it had entered into a $20.7bn deal with a consortium of six global investors comprising Global Infrastructure Partners, Brookfield Asset Management, Ontario Teachers’ Pension Plan Board, Snam, NH Investment & Securities and Singapore’s sovereign wealth fund GIC.

The deal represents the single-largest energy infrastructure deal so far this year, and brings $10.1bn in foreign direct investment into the UAE.

The group of investors will acquire a 49% stake in the newly formed subsidiary company, ADNOC Gas Pipeline Assets, including lease rights to 38 pipelines, while ADNOC will hold the majority stake of 51% and retain ownership of the pipelines.

“By completing this landmark transaction, we are sending a very strong signal to other potential partners from around the world, that ADNOC continues to be open and in fact, very ready for business,” Sultan Al Jaber, ADNOC’s CEO, told CNBC.

Bapco expansion remains on track

Elsewhere in the region, in mid-May the Bahrain Petroleum Company (Bapco) recently announced that the Bapco Modernisation Programme (BMP) was 50% complete and remained on track for completion by the third quarter of 2022. The BMP represents a huge undertaking for the Gulf state, with some $6bn being invested by the company to enlarge and fully integrate all aspects of its operations.

Speaking with OBG, Dawood Nassif, chairman and CEO of Bapco, emphasised the important role the modernisation programme will play in Bahrain’s economic recovery as the country emerges from the pandemic.

“BMP will have a profound impact on Bahrain’s wider economy, and the technology that we are implementing will enhance all aspects of our production, whether that is in yield improvement, environmental compliance or energy conservation.”

Despite the enormity of the project, Bapco has so far faced comparatively minimal obstacles as a result of the pandemic. Where there have been some delays, these have primarily been the result of temporary quarantine measures in some areas of the site and disruptions to global supply chains, with some of the technology and equipment used by the company sourced from a very limited number of suppliers worldwide.

“There were some slowdowns and this had some impact on our schedule, but on a project of this magnitude that sort of delay is negligible,” said Nassif. “There was some limited disruption on the supply side where manufacturers had their factories in countries in Europe and, to some extent, in the Far East, where production lines were slowed down or stopped. In all this, engineering and construction activities on the BMP did not stop for one day.”

Historic period

The coronavirus pandemic has sent shockwaves through the global energy industry as worldwide lockdown measures all but halted energy demand from the world’s economies.

Most dramatically, in late April, with storage capacity running dangerously low in the US, the price of WTI crude oil futures (expiring in May) plummeted into negative territory for the first time in history, with prices falling as low as -$40 a barrel.

In mid-April, the OPEC+ group of oil-producing nations had responded to the global drop in demand by agreeing to a production cut of almost 10m barrels of oil per day, the single-largest production cut in the organisation’s history. In early June the group agreed to extend the record oil cuts until the end of July.

While it is still too early to tell exactly when global energy demand will revert to pre-pandemic levels, what is clear to industry players is that this represents another cycle that needs to be ridden out.

“The world will recover in a couple of years but we will have learned a lot of lessons. We will want to drive, fly, use power and so on, and we can’t do any of this without energy. I am optimistic and expect improvement and profitability to come back, and as it does hopefully we can learn from this crisis and move forward,” Nassif said.

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