After returning from southern Africa recently, Siecap head of advisory John Henderson found himself plunged into isolation and spending the lockdown at his Woodgate Beach bolthole. The enforced restrictions were not hard to take and afforded Henderson time to speculate about the implications the COVID 19 pandemic might have on the energy sector going forward.
Henderson believes that as we emerge from life in lockdown to a global business landscape changed irrevocably by that innocuous looking virus, it is vital to learn from the experience – not least because we have failed to do so in the past.
When posed the question, “Did we learn anything from the GFC (global financial crisis)?” Henderson laughs heartily and replies, “I don’t think we did!” before tempering his response.
“We did learn that things can change very quickly and that it can change in both a positive and negative way, but I don’t think any of us envisaged the extent of change this pandemic has brought to us. Unlike the emerging nations that I’ve spent considerable time in, who seem to be constantly dealing with poverty-derived disruptions, we in the first world have all been sailing along merrily thinking our lives were very secure, but as COVID has revealed, that is not the case.”
Henderson feels that both the GFC and recent pandemic revealed the fickleness of markets and how global impact can be driven by small things which have big changes.
“We found out during the GFC that accountability goes across corporations and governments. In some ways, I feel that governments have learned more from the GFC in terms of taking accountability whereas for corporations, well, there are still some pretty poor examples showing lack of integrity and probity. Something I thought we might have learned from the GFC, we are rediscovering might not be the case.”
“For the energy industry, there has been a double whammy of reduced demand as economies have shut down because of COVID coupled with the OPEC/Russia price war which has wiped at least 50 per cent off the oil price. This has been very significant in the industry with the effect of making developers very circumspect about throwing capital into some of the projects that were looking prospective just six months ago. So, sustaining profitability in this market is quite a challenge for any energy developer, particularly in the traditional oil-based industries. We’ve seen that in the likes of Papua New Guinea where Total and EXXON Mobil seem to be withdrawing from their proposed developments there.”
Henderson feels some of these players will direct their reduced capital investment appetite into projects that have less technical complexity and, probably, better overall marginal economics; for example, in Mozambique where the volume of the discovery of offshore gas supports a low-cost product.
The current petroleum glut, Henderson believes, will give companies some ability to just reset their development timelines and be selective about projects that will deliver a price compatible with a reduction in the long-term oil price.
Henderson feels optimistic that this second “whammy” has something to teach us.
“It has to. In the next 12 months we’ll be in what I call an assessment phase. What we do know from this pandemic is that demand has been hugely suppressed and, in some cases, we are over supplied. I don’t see us doing much more than taking stock of the situation and trying to assess how long this could last. I believe that a new long run oil price will dictate the future profitability of the hydrocarbons and energy industries. A lower oil price will possibly reinject gas into the future energy mix, making it a more attractive option to compete with the galloping pace of renewables.
“The recent example of multiple LNG export plants being built in Gladstone, Queensland, right beside one another but each with its own pipeline and export infrastructure is a case study in poor strategic decision-making. These businesses banked their projects on high oil-parity pricing and long-term supply contracts, but the end result has been an Australian gas industry with high production costs and a decimated domestic industrial supply market. I think that the industry needs to look for aggregation opportunities, particularly as regards supply and delivery infrastructure. What I mean is, we should be looking to see how they can supply at a lower price. So, the commonality of infrastructure and the ability to coinvest, rather than stand-alone infrastructure, will be paramount and will help make the sector more resilient.”
Henderson’s final speculation is that recovery requires willingness on industry’s and government’s part to work together. “We’ve had the mindset that we can buy what we need and can export what we do well. I think our supply chain gaps have reinforced that we need to think strategically about our own domestic production. So, unifying government and industry towards closing those supply chain gaps and understanding that there is strategic importance to our own wealth of resources, is something that has been lacking and should be high on both governments’ and industries’ agendas.”
John Henderson, Siecap’s head of advisory, has over 35 years’ experience working in the energy sector. He has advised mining and oil multinationals on megaproject developments and assisted mid-tier and startup companies in finding their feet.