The ongoing Covid-19 pandemic has brought about a series of unprecedented challenges for the country’s oil and gas sector. The industry has been hit hard by the double whammy of demand destruction and a drop in crude oil prices. Oil and gas companies have been affected across segments and are facing drying revenue streams and liquidity constraints. While fuel demand started recovering with the phased unlocking of the economy, it is fluctuating once again due to lockdowns being reimposed in several states and a disruption in economic activities due to the monsoons. The sector thus requires government attention to help tide over the ongoing crisis.
Indian Infrastructure reviews the impact of the Covid-19 outbreak across the oil and gas value chain and the industry’s response to the current challenges…
The upstream segment is currently facing extreme distress due to the adverse impact of the Covid-19 pandemic. In April 2020, muted global demand due to the imposition of lockdown in several countries along with a supply glut arising from an output war among key global producers resulted in a historic crude oil price crash. Since then, a truce among the Organization of the Petroleum Exporting Countries plus nations to cut production and the resumption of economic activities in various countries have led to oil prices recovering to around $45 per barrel (Brent) from the abysmal levels of below $20 per barrel in April. However, they are expected to remain volatile in the near term.
The low level of oil prices coupled with fiscal levies such as royalty, cess and profit on petroleum are severely impacting performance in terms of cash flow and liquidity management for exploration and production (E&P) companies. They will therefore be left with insufficient surplus to reinvest in exploration and field development. Further, gas prices have also been reduced, and this will increase the losses from gas production for national oil companies.
In the present scenario, many players in the upstream space have been compelled to consider rationalising their capital expenditure plans and put key projects on hold. This is likely to have a negative impact on the government’s plans to increase domestic output and achieve self-sufficiency. The country’s high dependence on imported oil and liquefied natural gas (LNG) for meeting energy requirements is thus likely to continue. However, the import bills are likely to soften. During the April-June 2020 period, while the country’s crude oil imports fell to 44.8 miliontonnes (mt), decreasing by 19.1 per cent as compared to 55.4 mt in the corresponding period of the previous year, the import bill declined by over 68 per cent from $27.3 billion to $8.6 billion.
To recover from the ongoing crisis, the upstream sector requires sufficient government attention and support. In April 2020, to increase the ease of doing business for upstream companies, the government simplified procedures for oil and gas exploration and production by permitting self-certification for a host of compliance such as discovery notification and deemed consent for investment in fields within a stipulated time frame. The simplified norms have been introduced for production sharing contracts under the pre-New Exploration Licensing Policy (NELP) and NELP oil and gas blocks. However, greater relief is required, especially in the form of reduction of cess and royalties and rationalisation of the gas pricing regime, to provide a certain floor price level to make production viable.
India currently suffers from a low density of pipelines. In the past few years, earnest efforts have been made to expand the pipeline infrastructure. However, the countrywide lockdown and subsequent local lockdowns in several states have affected the pace of pipeline development. Pipeline projects took a hit primarily due to physical distancing requirements along with the labour migration crisis. Some of the key projects that came to a halt are the PradhanMantriUrja Ganga project, the Northeast gas grid and the Kochi-Mangalore pipeline project.
Recently, in order to develop new gas markets in areas far from gas production facilities and import terminals, the government has decided to rationalise gas pipeline tariffs by shifting to a unified tariff system. The Petroleum and Natural Gas Regulatory Board (PNGRB) has finalised the draft regulation and is expected to fix the tariff by end August 2020.
The lockdown also reduced the demand for LNG. This led to the plummeting of the average gas send-out from regasification terminals including the Dahej terminal. LNG importers such as Petronet LNG and the Gujarat State Petroleum Corporation were compelled to invoke force majeure and send notices to suppliers as domestic gas demand and port operations were hit by the virus outbreak.
The massive demand destruction caused by the pandemic has significantly impacted the refining and marketing segments. Overall fuel demand crashed by around 46 per cent in April 2020 with the demand for petrol, diesel and aviation turbine fuel declining by 60 per cent, 56 per cent and 91 per cent, respectively, due to the countrywide lockdown and air travel restrictions. However, liquefied petroleum gas (LPG) witnessed a 12 per cent increase in consumption in April 2020. This was in part because, in March, the government had announced that over 80 million PradhanMantriUjjwalaYojana beneficiaries would be entitled to a total of three 14.2 kg LPG cylinders for free during April-June 2020.
With the steep decline in fuel demand, capacity utilisation rates at several refineries plummeted to as low as 30-40 per cent in late March and April 2020. Further, while demand started recovering with relaxations in the lockdown and a revival of the economy in May and June 2020, it started slowing again in July. High fuel prices, renewed lockdowns in several parts of the country and industrial and construction activities being hampered with the onset of the monsoons have led to a reduction in fuel demand. As a result, several refiners are once again cutting crude processing and shutting units for maintenance to remain afloat. Moreover, refining margins are expected to remain weak in the coming months due to poor global demand growth. Besides, the government hiked the excise duty and cess on petrol and high speed diesel twice (in March 2020 and May 2020), wiping out the gains accruing to oil marketing companies.
Gas utilities have also been impacted by the steep fall in demand due to the lockdown and price disparities across spot LNG and term LNG contracts. While the city gas distribution (CGD) segment has witnessed a reduction in demand especially from transport, and the commercial and industrial segments, gas offtake from the power and fertiliser sectors has helped the industry endure the demand shock. In fact, during the April-June 2020 period, gas consumption by power plants increased by 11.7 per cent as compared to consumption levels in the corresponding quarter of last year. The lower spot prices (due to a reduction in global demand) has made LNG competitive for power plants, leading to a switch in generation from coal-based plants to gas-based ones.
In the CGD segment, while gas demand is expected to return to pre-Covid levels in the near term with the gradual uptick in economic activities, the marketing margins for marketers of term LNG are likely to be hit due to price differences and high unsold inventories. Moreover, the outbreak has also affected project execution. Several CGD projects are likely to be delayed due to issues caused by lack of labour availability.
On a positive note, the pandemic has accelerated the shift towards cleaner fuels including natural gas. In the past few months, several initiatives have been taken by the government to increase the use of gas. In a major development, the Petroleum and Natural Gas Regulatory Board (PNGRB) announced that any entity can set up an LNG filling station in a geographical area (GA) or anywhere else, even if it is not the authorised entity for the particular GA. This will enable the setting up of LNG distribution infrastructure, expand access to the fuel and attract private investors. Besides, the government is also expected to allow competition in networks where the market exclusivity period for CGD companies has ended. The competition can help in lowering tariffs and reducing consumers’ gas bills apart from giving them the option of choosing the operator that provides better services.
Adoption of new technologies
The Covid-19 outbreak has pushed the oil and gas industry to accelerate digital transformation at all levels of the operation cycle. The use of advanced technologies such as artificial intelligence, deployment of sensors and increased automation can help companies in reducing operational costs and improving safety. Besides, the convergence of information technology (IT) and operational technology (OT) can yield noteworthy results such as enhanced extraction efficiency, predictive maintenance of equipment, real-time asset monitoring and tracking, as well as optimal use of the workforce. Companies such as the Oil and Natural Gas Corporation and Oil India Limited are taking steps to integrate their IT and OT solutions. Besides, the deployment of drones by oil and gas players including Bharat Petroleum Corporation Limited has also gained traction to ensure that workers are following distancing norms.
The country’s oil and gas sector is witnessing extremely tough times due to the disruptions caused by the Covid-19 pandemic. The massive erosion of demand coupled with low prices has significantly affected the operations of oil and gas players. The situation is unprecedented and will require focused attention from oil and gas companies, service providers and the government for the sector to bounce back from the crisis. Besides, the adoption of digital solutions can help the industry in preparing for the new normal while reducing operating costs and increasing efficiency.
Nikita Chhabra and Shunyam Nanda