Covid-19 likely to cause supply shortage, multi-billion-dollar project delays – Analysts
Norway-headquartered energy research company, Rystad Energy, estimated the new coronavirus or Covid-19 outbreak to take a toll on the energy and gas sectors. It said that Covid-19 may cause extensive staffing and supply shortages in countries where floating production, storage and offloading (FPSO) vessels are being built. This will in turn delay project deliveries by at least three to six months, it added. Out of a global total of 28 floating production, storage and offloading (FPSO) vessels that are under construction, 22 are being built at shipyards in China, South Korea and Singapore.
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If the epidemic escalates, the delays could increase to nine or even 12 months, especially taking into account the restricted time windows for heavy transport, installation and hook-up. The average development time for an FPSO is 36 months, meaning that companies could face a 30% delay.
“Although operators and contractors are looking into ways to make up for some of the time that will be lost by fast-tracking other stages of development, we anticipate first oil or gas for these projects will face clear delays,“ says Rystad Energy Partner and Head of Oilfield Service Research Audun Martinsen.
To date, 28 FPSOs are under development globally, 15 of which are being built in China. Seven are under construction in Covid-19 hotspot South Korea, as well as in Singapore, while six additional vessels are being constructed elsewhere.
Many Chinese workers received a holiday extension in early February after the Chinese New Year, aimed at limiting the spread of the coronavirus disease. However, even as workers return to the yards, Rystad Energy expects projects may still have to contend with 30% to 50% fewer work hours.
Construction progress may also be slowed by supply delays, as the delivery of bulk materials, modules and equipment is hampered by transportation restrictions both within and outside of mainland China. The plant utilization rate in China’s equipment manufacturing sector has now fallen to less than 10%.
In addition, project management will face severe issues as travel bans restrict contractors, engineering firms, certification companies and exploration and production (E&P) officials from accessing shipyards. This became particularly apparent after news broke that the coronavirus had spread to the Lombardy region of Italy, the backyard of major contractor Saipem, forcing the company to ask thousands of workers to stay home until further notice.
Experts are said to be uncertain of when the effects of the epidemic will ease. Nonetheless, they expect the situation to worsen in March and the impact of the virus is not limited to Chinese fabrication yards – it affects the entire global service industry.
As the virus has caused reduced industrial activity and travel restrictions in China and beyond, much of this year’s global expected oil-demand growth will be lost.
Oil prices have already dipped below the US$50/barrel threshold and could fall further if OPEC does not implement additional supply cuts. Lower oil prices will result in oil and gas companies scaling down their flexible investment budgets, especially shale operators in the US as well as some offshore E&P players.
“Our current assessment forecasts that Covid-19 could result in global E&P investments falling by around US$30 billion in 2020 – a significant hit to the industry,“ Martinsen concludes, adding that some of these investments are likely to come back in 2021.