a whitewater raft before it goes down a rocky incline to represent the economic disruptions in the energy sector caused by COVID-19

COVID-19 and Disruptions in the Energy Sector | Preparing for the New Normal

by kirkcoburn
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Declared a global pandemic earlier in the year, COVID-19 and its effects go well beyond health matters. Though it started as a “health” pandemic, you’d be forgiven for calling it just as much of an economic one due to all the disruptions in the energy sector and the economy at large. Despite several conflicting reports, some estimates say that possibly over 40 million Americans have lost their job due to the pandemic. It gets worse. With the effects of COVID-19 projected to remain for an extended period, 42% of the job losses may become permanent. Shale gas markets are also getting upended, and the pandemic isn’t helping.

How did it get so bad so fast? 

We all experienced it so let me save you from my version. Regardless, it crushed many if not all of us spiritually, vocationally, financially, emotionally, intellectually, socially, and physically (I am heavier now than when this started but also in better shape, go figure). And for those of us in this domain, the energy sector is among the worst hit.

Read on to find out how the pandemic has created disruptions in the energy sector.

1. It’s Reducing Demand and Making Prices Plummet

According to an IEA Oil Market Report released in April, the then-current oil demand fell to 29% lower than a year before — a level that we last saw in 1995. Gas and electricity prices are also dropping due to the pandemic.

For instance, the demand for electricity in some European countries has reduced significantly, resulting in negative prices as per data released by HUPX (Hungarian Power Exchange) and Nord Pool, the leading power market in Europe. Though this happens in some countries during the weekend without causing alarm, they are now seeing negative figures during the weekdays.

Countries where strict stay at home measures were put in place display the highest reduction in demand. For Italy, France, and the UK, the demand for electricity reduced by 25%, 20%, and 12%, respectively.

Natural Gas Demand

In 2018, the demand for natural gas experienced a jump of 5%, which reduced to 1.8% the following year. With demand for the commodity already slowing down, COVID-19 has come to compound misery on the sector in 2020.

According to the International Energy Agency’s new Gas Report 2020, natural gas consumption will reduce by 4% this year. This drop (which equates 150 billion cubic meters) is double the loss experienced after the 2008 financial crisis.

Though all regions will experience reduced demand, it will disproportionately affect the more mature markets. These markets, including North America, Asia, Europe, and Eurasia, will account for three-quarters of the reduced demand.

2. There’s More Volatility and Risk

Presently, most governments must choose between prioritizing their residents’ health (and/or political persuasion) or balancing it with the economic needs of their nations. Many argue that these are not mutually exclusive. Undoubtedly, the economic effects of the pandemic have been devastating. As governments plan to ease stay at home measures and revive economies, there is growing optimism within the energy sector.

However, this does not translate to a resumption in normal operations or demand levels returning to pre-COVID times. The virus is still being used as a political/health lever making the short- and medium-term future of the energy sector uncertain. 

First of all, the earliest prospect of having a vaccine for the virus is in 2021. This means that until such a time, many nation-states will decide to keep people locked down. There are high chances of the emergence of a “second wave” of infections, as already witnessed in some regions.

Even as energy companies prepare to resume operations, it is vital to identify different eventualities and prepare for them. This should be coupled with efforts to boost flexibility, which will be crucial for building much-needed resilience.

To achieve this, organizations should acknowledge that recovery will be a continuous process.

3. Where’s the Security of Supply?

One of the primary challenges that came with the pandemic is disruption in the energy sector’s supply chains. Accessing markets or raw materials became problematic, which then translated to low production and shortages in closed out regions. And not to get off-topic, the same thing happened to the bicycle and work out equipment supply chains as well.

As containment measures continue to ease, supply chains are reopening again. However, with COVID-19 set to remain a major threat for the foreseeable future (whether real or perceived), there are chances of future disruptions to supply chains. As such, we need to focus on the security of supply in the energy sector. This means re-evaluating supply chains and testing their resilience as operations resume.

Another option is shifting to localized supply chains, as is the case in the chemicals and metals industries. By sourcing starting materials and precursors closer to the markets, companies can mitigate (or at least manage) supply chain disruption. 

4. The Shift to Automation and Digitalization

Because of improving technology, automation and digitalization have become a common theme in the energy sector. I stated in April that we are already in the digital adoption era. As the name suggests, with automation comes less reliance on human involvement to perform repetitive tasks. With COVID-19 depleting companies of their employees for extended periods, the need for automation has never been greater.

Organizations that rely on human resources for all aspects of operation now have to invest in digitization and automation tools. Companies that had already invested in digitizing operations enjoyed greater resilience during the crisis. Even still, all players in the energy sector need to continue investing in automation and digitization.

This will help in customer and operations management to reduce the workload on human resources and, more importantly, help reduce supply chain disruption. This will allow better business continuity should disruptions in the energy sector arise.

Another trend that’s likely to be observed in the coming months is the shift to remote and virtual teams that can work from a distance. When governments imposed strict stay-at-home measures, organizations empowered staff to work remotely to ensure operations do not come to a complete halt. After experiencing the benefits of a remote workforce and the likelihood of future disruptions, companies will continue to invest in virtual teams.

Even after the pandemic is over, remote teams will be a mainstay in the energy sector as they boost productivity while providing increased agility.

5. Behavior Changes Are Causing Disruptions in the Energy Sector

a raft representing energy companies as they struggle against disruptions in the energy sector
The energy sector will need to fight against reduced demand and changes in consumer behavior to stay profitable.

As a whole, the energy sector is broad — there are many different products. Though the products are separate, they influence each other’s demand and price. And the supply and demand of each product greatly affect pricing.

Due to COVID-19, supply chains faced disruption, and the demand also plummeted. Because of these disruptions in the energy sector, there are questions as to how consumer behavior will change after the pandemic. Are people and organizations going to return to their old habits, or will they emerge with new ones post COVID?

There were significantly lower carbon emissions during the lockdown. Also, some regions were able to transition to renewable sources of electricity, which adequately met their needs. As such, there are indications that the demand for certain energy products may not return to pre-COVID levels.

This is because individuals may shift to renewable alternatives for environmental benefits. Also, with increased reliance on remote teams and video conferencing, work-related travel may reduce the demand for oil along with it. 

6. There’s a Renewed Sense of Vulnerability

The energy sector plays a significant role in the global economy. It facilitates travel and powers all other industries. However, energy companies are still susceptible to disruptions, as demonstrated with the pandemic. To safeguard organizations from disruptions and ensure business continuity, companies have measures to help deal with disruptions in the energy sector.

However, COVID-19 provided a reality check of sorts. It was an unprecedented threat that only a few, if any, organizations had prepared for. 

Going forward, players in the energy industry must go beyond regular threats such as cybercrime and natural disasters when developing crisis management strategies. Companies need to broaden the definition of “risk” in the corporate setup to include pandemics and catastrophic trends. Yes, it may sound ridiculous now  — but the idea of a novel virus spreading from one town to the entire globe and crippling economies in the process sounded ridiculous a year ago, too.

Such efforts should also be accompanied by structural changes to enhance agility and resilience. When oil prices hit record lows, it significantly compromised high-cost producers. To reduce production costs, such producers should turn to collaborative partnerships and consolidation.

What’s Next for the Energy Sector?

Factors such as supply chain disruption and travel restrictions — which all wrapped up into reduced demand — resulted in the plummeting of oil and gas prices and uncertainty. With consumers set to emerge from the ease of lockdown measures with new behaviors, an agile approach to operations resumption is necessary. If the situation persists for long, the new behaviors may become the new normal, translating to reduced oil and gas in the long run, thus creating more disruptions in the energy sector.

Are you thinking of getting your solution underway in the energy sector? Get in touch with me to find out how you can get funding for your new venture.

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