Impact of Covid-19 on the oil and gas sector and decarbonisation in LICs and MICs Executive summary Covid-19 has had an unprecedented impact on the global economy and oil and gas sector. This paper presents a review of its impact on LICs and MICs, focusing on exporting and importing countries, as well as the wider issue of decarbonisation. Key findings include: - Global GDP will remain lower than pre-Covid-19 forecasts into the medium term (-2.1% in 2023), even in the case of a strong recovery (and no second wave). - Within Sub-Saharan Africa, it is likely that, due to a reliance on oil revenues, exporters will be among the hardest hit, with average GDP contraction of -2.8% in 2020. - The knock-on effect of reduced revenues on budgets, combined with measures to control Covid-19, could lead to political instability in some countries. - International oil companies operating in SSA are slashing capex spending, and a large number of projects will now be delayed. The likelihood of suppressed oil prices (below $48) in the next few years means some projects will not be profitable and will not move forwards, and some countries that have been trying to attract investment for a number of years may have missed the opportunity to exploit their resources. - LNG contracts have been cancelled and deferred, and projects delayed, but the impact has been less than on oil, with demand up 8.5% year on year. - Oil exporters in SSA will all see a drop in economic performance, but this differs by country: o Angola had already been badly affected by the 2015 drop in oil prices and two tropical hurricanes in 2019. Despite winning praise for recent reform attempts, the country was in recession going into 2020 and Covid-19 will contribute to a contraction of GDP of -2.3%. o Nigeria is Africa’s largest oil exporter and has had to cut its budget by nearly half. Further, debt is increasing and projects delays and cancellations will likely result in reduced outputs for the next decade. As such, the country is facing severe economic challenges. o Since discovering significant gas reserves ten years ago Mozambique has emerged as a leading player in LNG. Covid-19 will see some projects delayed, but the Mozambique LNG project achieved $15 billion in debt financing during the crisis, and the country’s GDP growth forecast, while significantly reduced, remains positive at 0.7%. o Ghana has grown its oil sector rapidly in recent years, but the country is not yet reliant on oil exports. Lost revenue will cost the country around $1 billion (of $1.6 billion in expected Covid-19 losses). While GDP growth this year will be reduced significantly, it is still forecast at 2% to 2.5%. o Senegal recently discovered reserves, but projects have been delayed, with low oil prices threatening their viability. The GDP growth forecast has been cut from 6.5% to 1%.
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Impact of Covid-19 on the oil and gas sector and decarbonisation in
LICs and MICs
Executive summary Covid-19 has had an unprecedented impact on the global economy and oil and gas sector. This paper
presents a review of its impact on LICs and MICs, focusing on exporting and importing countries, as
well as the wider issue of decarbonisation.
Key findings include:
- Global GDP will remain lower than pre-Covid-19 forecasts into the medium term (-2.1% in
2023), even in the case of a strong recovery (and no second wave).
- Within Sub-Saharan Africa, it is likely that, due to a reliance on oil revenues, exporters will be
among the hardest hit, with average GDP contraction of -2.8% in 2020.
- The knock-on effect of reduced revenues on budgets, combined with measures to control
Covid-19, could lead to political instability in some countries.
- International oil companies operating in SSA are slashing capex spending, and a large
number of projects will now be delayed. The likelihood of suppressed oil prices (below $48)
in the next few years means some projects will not be profitable and will not move forwards,
and some countries that have been trying to attract investment for a number of years may
have missed the opportunity to exploit their resources.
- LNG contracts have been cancelled and deferred, and projects delayed, but the impact has
been less than on oil, with demand up 8.5% year on year.
- Oil exporters in SSA will all see a drop in economic performance, but this differs by country:
o Angola had already been badly affected by the 2015 drop in oil prices and two
tropical hurricanes in 2019. Despite winning praise for recent reform attempts, the
country was in recession going into 2020 and Covid-19 will contribute to a
contraction of GDP of -2.3%.
o Nigeria is Africa’s largest oil exporter and has had to cut its budget by nearly half.
Further, debt is increasing and projects delays and cancellations will likely result in
reduced outputs for the next decade. As such, the country is facing severe economic
challenges.
o Since discovering significant gas reserves ten years ago Mozambique has emerged as
a leading player in LNG. Covid-19 will see some projects delayed, but the
Mozambique LNG project achieved $15 billion in debt financing during the crisis, and
the country’s GDP growth forecast, while significantly reduced, remains positive at
0.7%.
o Ghana has grown its oil sector rapidly in recent years, but the country is not yet
reliant on oil exports. Lost revenue will cost the country around $1 billion (of $1.6
billion in expected Covid-19 losses). While GDP growth this year will be reduced
significantly, it is still forecast at 2% to 2.5%.
o Senegal recently discovered reserves, but projects have been delayed, with low oil
prices threatening their viability. The GDP growth forecast has been cut from 6.5%
to 1%.
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- In terms of importing countries, analysis supports the logical assumption that lower oil
prices will be of benefit. However, the wider Covid-19 situation makes this less clear.
o South Africa entered Covid-19 in the midst of economic turbulence. Lockdown
restrictions and suppressed economic activity mean the country’s economy may
contract by -7% this year, and there is the possibility of a severe debt crisis. Plans to
develop Brulpadda reserves will now be delayed.
o China has accounted for 80% of the growth in oil demand since 2003. Its economy
contracted -6.8% in the first quarter of the year, but, having been hit early, is now
growing again.
o India’s economy had slowed to its lowest rate of growth in a decade prior to Covid-
19, and severe lockdown measures and limited stimulus actions will see a
contraction of -7% in 2020.
o Indonesia is both a producer and importer of energy, but faces maturing fields.
Covid-19 will see its economy shrink by at least -2.8% in 2020.
- In terms of decarbonisation, an initial uncertainty is the global economic recovery, which
could see GDP increase by 5.8% in 2021 – but a number of risks threaten this.
- International oil companies, such as BP and Shell, have announced write downs and/or net-
zero carbon plans, but significant scepticism exists among environmental campaigners.
- There is debate around how lower oil prices will affect consumer behaviour, with
uncertainty over the growth of electric vehicles and air travel.
- In terms of LICs and MICs, decarbonisation will be impacted by the reliance of existing
political structures (and stability) on oil rents.
- The potential for stranded assets is increasingly clear, and higher risks may curtail upstream
projects.
- The struggles of resource rich LICs and MICs to cope with Covid-19 may highlight the
unequal apportioning of benefits, especially given how local communities are often
negatively impacted by exploration activities.
- As oil prices remain low, competition for international investment, and resulting commercial
terms which favour oil companies, may reduce the attractiveness of natural resource
exploitation for some countries.
- China’s role in decarbonisation will be particularly important:
o Covid-19 has seen subsidies to renewables cut from $3.7 billion to $2.1 billion.
o Reduced electricity demand may reduce the requirement for more coal (coal
running in 2020 is down -8.4% whereas renewables are up 7.6%).
o There is now the opportunity for a green stimulus package.
o The energy intensity target of 15% by 2020 has been cut, but anti-globalisation
sentiment may see continued focus on renewables as a core industry.
- Finally, the generation mix of individual countries will determine the impact of reduced oil
and gas prices on future investments. For countries such as Nigeria, which rely on gas- and
oil-fired generation, the economic argument for renewables will be reduced.
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Global context The steps taken by countries around the world to reduce the impact of Covid-19 have significantly
reduced economic activity, resulting in an unprecedented reduction in global GDP. Although recent
forecasts suggest a recovery is now underway, and global GDP growth is expected to turn positive in
the remainder of 2020 and through 2021, Covid-19 will have a lasting impact, with GDP down 2.1
percentage points in 2023, as shown in Figure 1. (A serious second wave could increase the impact
on GDP.)
Figure 1 Lasting economic damage expected from Covid-19
In terms of energy, Covid-19 is expected to reduce total primary energy demand by 6% in 2020
compared to 2019, the largest relative decline since the Second World War and the biggest ever
decline in absolute terms. Oil demand dropped 25% in April and is expected to be down 8% across
2020, with transport demand dropping particularly sharply. Gas demand is expected to fall 4%,
supported somewhat by increased use in generation as a result of lower prices.
The price of Brent crude oil plummeted in March, and, despite recovering, partly as a result of
record cuts to production agreed by OPEC, closed at $40 (for the August contract) on the 24th June.
Figure 2 presents the price of Brent over the past ten years and highlights the dramatic impact of
The economies of oil-exporting countries in SSA will be impacted heavily by Covid-19. In its April
Regional Economic Outlook the IMF revised its GDP growth forecasts for the region sharply
downwards from its October 2019 World Economic Outlook numbers, as illustrated in Figure 5. Real
GDP in SSA is projected to contract 1.6% in 2020, with oil exporters1 (-2.8%) and resource-intensive
countries (-2.7%) hit particularly hard2. These findings are presented in Figure 5.
1 The IMF classifies oil exporters as countries where net oil exports make up 30% or more of total exports (Angola,
Cameroon, Chad, Republic of Congo, Equatorial Guinea, Gabon, Nigeria and South Sudan); other resource-intensive countries are those where non-renewable natural resources represent 25% or more of total exports (Botswana, Burkina Faso, Central African Republic, Democratic Republic of Congo, Ghana, Guinea, Liberia, Mali, Namibia, Niger, Sierra Leone, South Africa, Tanzania, Zambia and Zimbabwe); and non-resource intensive countries are those that are not classified as either oil exporters or other resource-intensive countries (Benin, Burundi, Cabo Verde, Comoros, Ivory Coast, Eritrea, Eswatini, Ethiopia, The Gambia, Guinea Bissau, Kenya, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Rwanda, São Tomé and Príncipe, Senegal, Seychelles, Togo and Uganda). 2 The hardest hit group is expected to be tourism-dependent countries (Cabo Verde, Comoros, The Gambia, Mauritius, São Tomé and Príncipe, and Seychelles), which may experience a GDP contraction of −5.1% in 2020 after growing by an average of 3.9% in 2019.
Senegal has been relatively successful at containing the virus, with 5,475 recorded cases and 76
deaths, as of 22nd June. There has been no full-scale lockdown, but a curfew has been put in place
and mass gatherings have been banned. The government announced in April the deployment of an
economic and social resilience plan worth $1.68 billion, in order to support the country’s economy
during the crisis. In a recent interview with the Financial Times, President Macky Sall warned that the
best case scenario is for GDP growth to drop from the forecast 6.5% to 1%. If the pandemic
continues he expects the country to enter recession.
Impact on oil and gas importing LICs and MICs It is not easy to assess the impact of lower oil prices on oil and gas importers. Logically, lower oil and
gas prices should benefit importing countries, and this assumption is backed up by analysis from
Oxford Economics, presented in Figure 6. However, the lower oil prices have coincided with severe
global economic challenges resulting from Covid-19, as well as lockdowns and other measures taken
by the importing countries. As such, importing countries have not necessarily benefitted from lower
prices.
Figure 6 Projected % change to GDP from oil at $30 per barrel, 2020-22
This report now focuses on a selection of countries which import oil and/or gas: South Africa, China,
India and Indonesia.
South Africa Although it is the most industrialized nation on the African continent, South Africa has virtually no oil
production. Given that the country imports fuel and refines crude domestically to meet the bulk of
demand, and the cost of gasoline and diesel is often a key driver of consumer prices, oil’s decline