Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
Figure 1: Operational, policy and economic interruptions from
COVID-19
The oil and gas industry is having to rethink the way in which
it works yet again. Five years after the 2014 oil price rout
unleashed waves of stress in the form of government austerity
budgets, company cost-cutting, and shifts in asset preferences,
coronavirus (COVID-19) has thrown a new set of challenges into
relief, forcing companies and host countries to adapt. It's not
just an operational issue, although plenty of rigs, platforms,
worker rotations and equipment deliveries are being affected by the
pandemic. Rather, the bigger issue is the long tail caused by an
extended brush with sub-$50/bbl prices. Few producing countries or
companies are likely to emerge unscathed or unchanged by the
pandemic, or more accurately, its impact on global oil and gas
demand, cash flows, investment strategies and project finance.
Still, some resource holders are in a far better position than
others to adapt as a result of structural factors and policy
choices. This will make for a recalibration in global upstream
investment attractiveness as assessed by IHS Markit's PEPS E&P
Attractiveness Index.
Comparing peers Q2 2014 vs Q2 2020
Our recent report - Oil & Gas Risk Quarterly: COVID-19 and
the shifting above-ground calculus for E&P investment - details
how COVID-19 is playing into above-ground risk across over 80
countries globally and looks at the factors that will help
determine the speed and effectiveness of any recovery based on
entrenched systemic factors and those that host governments have
more control over.
In our above-ground risk analysis, IHS Markit divides resource
holding countries into five peer groups based on structural factors
relating to the role of oil and gas in the economy, access to
fallback options such as sovereign wealth funds or alternative
industries, and E&P industry maturity. Two peer groups show
particularly distinct risk changes post-COVID - those that are
oil-dependent, which generally lag the rankings for overall E&P
risk and where above-ground risk has generally deteriorated since
2014, and frontier and early stage producers, which have seen the
least movement in risk through the course of the last six years, in
part due to their relative independence from oil price cycles.
Figure 2: Peer group movement: Aggregated risk changes Q2 2014
to Q2 2020
Oil dependents:
The worst immediate hit from the pandemic will be on oil
dependents, already in poor shape as a group. These established
producers' economies rely on oil for over 20% of exports and the
oil and gas sector is a first port of call to support political
systems and economic strategies. Where possible, many governments
in this peer group have tended to ride out previous oil price
gyrations, hoping for a recovery in fortunes via external factors,
rather than implement holistic and structural change at home -
whether of the broader economy, or of the hydrocarbon sector.
Where hard choices on spending and savings have already been
deferred, the economic impacts of COVID-19 may be the final straw
forcing more immediate change on governments with limited room for
manoeuvre. This will increase the risk of civil society unrest on
the one hand - and defaults and non-payment to trade partners and
investors on the other, as governments chart an uncertain path
between the newfound economic constraints, host publics wearied by
rounds of austerity and the demands of E&P investment partners.
Recourse to the IMF and multilateral funding is one option
traditionally available for distressed producers, but one that
often carries a high political cost, suggesting significant
political and policy volatility amongst this peer group while the
price lows continue. Longer-term, the size of the resource base,
the availability of monetisation options and a strong E&P
investor mix will provide some advantages to this peer group over
time if governments can weather the immediate storm. Where
political and institutional wherewithal allow, some governments may
act to improve contractual terms and flexibility as a means to
kickstart revival, a must-have for many countries in this peer
group given future intense competition for capital.
Figure 3: Extreme economic shock across oil-dependent economies
as exports and revenues plummet relative to 2019
Frontier and early stage producers:
Post-COVID, those producers with less than 200,000 boe/d in play
and significant perceived upside will feel less direct impact from
the oil price cash near-term, at least where energy economies are
concerned. There may even be current account benefits as a result
of lower energy import costs amongst this group. However, the
reliance on external capital and technical expertise leaves many
peers in this group hostage to the strength of their E&P
investor mix and the strategies of a select group of companies.
Cuts to E&P discretionary spending will tend to hit this
group hard, given the disproportionate impact of curtailed
exploration expenditure. Moreover, investor moves to defer final
investment decisions in a period of oversupply will also affect
would-be producers where projects are in the early stages or have
yet to pass sanction: Cyprus is one country grappling with such
challenges. Near-term leverage for these host governments tends to
be limited, given weak technical and financial wherewithal, a
generally shallow competitor mix and often, hurdles to
commercialisation and monetisation, particularly where natural gas
assets are concerned. Those frontiers and early stage producers
where projects are advanced or entering production are in a far
better position and may even look to start tightening terms to
match the de-risking of geological and commercialisation
approaches. It is likely, however, that some will over-rate their
attractions in a changing market, making for divergent tracks on
contractual and fiscal change in this peer group in particular,
where regulatory volatility is often at its most extreme.
What next?
Looking ahead, producing and frontier countries are likely to
come under increasing pressure to make adjustments to their
upstream investment environments in order to capture investment
from diminished global E&P capital pool. Research undertaken so
far suggests that there are significant difference in countries'
motivation to secure E&P investment as well as in governments'
capacity to implement the required changes. In our next Oil &
Gas Quarterly, we will look at early signs of regulatory shifts and
assess the likelihood that different producer states will follow
through with such changes.
Catherine Hunter is a Director for North Africa and
Levant in IHS Markit's exploration and production (E&P) terms
and above-ground risk group.
