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Uncharted territory

Published by , Senior Editor
Hydrocarbon Engineering,

As this article was underway, the global oil market was swept into uncharted territory. The World Health Organization (WHO) declared the coronavirus known as COVID-19 to be a global pandemic. The global response is hugely uneven, with some areas apparently unconcerned while others are cancelling events, closing businesses, issuing mandatory shelter-in-place orders, and launching full travel bans. The situation is rapidly changing, and not for the better. The initial draft of this article was completed on 26 March 2020. This update is being written four weeks later, on 23 April 2020, in order to present the best data available before going to press. In just those four weeks, COVID-19 has spread shockingly. According to the Johns Hopkins Coronavirus Resource Center, as of late-March 2020 there were approximately 530 000 confirmed cases, with nearly 24 000 deaths. As of late-April 2020, there are approximately 2.65 million confirmed cases, with a death toll approaching 185 000 – five times the number of confirmed cases and with 7.7 times the casualties. The US is now far and away the centre of the pandemic, with nearly 843 000 cases and deaths approaching 46 800. Spain, Italy, France, Germany, the UK, Turkey, and Iran all have surpassed China.

There were few cases in Sub-Saharan Africa so far, but the disease is now appearing in many countries. Can the region cope with the pandemic? On the positive side, COVID-19 has caused the greatest number of fatalities among senior citizens, and the median age of Africa’s population is only 19.7 years. In contrast, the median age of Western Europe’s population is 43.9 years. Also, many countries in Sub-Saharan Africa have had experience handling epidemics, such as the Ebola outbreak in 2014. On the negative side, the region has at-risk populations suffering from malnutrition, HIV/AIDS, and other health issues. The COVID-19 pandemic is far from over and impossible to predict. Even if the disease largely spares the region, there will be severe consequences for the region’s economy. There were 927 cases confirmed in South Africa as of late March. Johannesburg’s O. R. Tambo International Airport –the busiest airport in the region – announced that foreign nationals would not be allowed to disembark there. By late-April, South Africa had 3635 confirmed cases and 65 deaths.

The article focuses on the belt of Sub-Saharan countries traversing Africa from West to East, chiefly those with oil resources and downstream petroleum industries, and stopping short of the south Africa region. Under current market conditions, it is safest to assume delays in any oil exploration and development projects, as well as in downstream construction and expansion projects. There are known deposits of oil in many Sub-Saharan countries, and their governments have hoped to develop these reserves. There are also refinery construction and modernisation projects underway or planned. Even before the coronavirus pandemic, however, the global crude market has been oversupplied. In the Sub-Saharan area, some of the oil-prospective areas are landlocked and in difficult terrain. Fuel markets are usually small and often far flung, affecting refinery economies of scale. Gaining access to markets may also require country-to-country negotiation so that resources can cross national borders.

Developing the petroleum industry from upstream through downstream already was a challenge in many countries in Sub-Saharan Africa. The year 2020 is bringing what must surely be the greatest challenge in the history of the petroleum industry. The Sub-Saharan industry is sailing into uncharted territory, along with the global industry.

Coronavirus brings global oil price crash

It is impossible to overstate the dramatic downturn in today’s oil market, with demand falling and supplies increasing at the same time. As the year 2020 began, the world oil market already was over supplied, placing downward pressure on prices. The OPEC+ group was continuing with its agreement to support prices by limiting oil production. As COVID-19 continued to spread in early 2020, oil and equities prices began to slide steadily downward as investors sought safe havens. In early March, Saudi Arabia advocated that the OPEC+ group cut production even further than already agreed. Russia, the leader of the non-OPEC producers in the group, refused. In the past, Saudi Arabia had borne the majority of the production cuts. This time, Saudi Arabia instead announced that it would increase its crude production from less than 10 million bpd in March to 12.3 million bpd in April, effectively launching an oil price war. Crude oil prices collapsed. On Friday 6 March, Brent crude futures prices had opened on the Intercontinental Exchange (ICE) at US$50.25/bbl. On Monday 9 March, Brent futures prices opened at US$38.28/bbl, a drop of nearly US$12/bbl. Prices continued to weaken, and Brent futures opened on 25 March at US$27.80/bbl. During the period from 2 January to 25 March 2020, Brent prices had plummeted by US$37.22/bbl, a shocking drop of 57%.

By early April 2020, Russia and other global producers relented, acknowledging the need for additional oil production cuts. Global oil inventories are burgeoning, and storage tanks are rapidly filling. The OPEC+ group conducted teleconference meetings with a host of producers, labelled the OPEC++ meetings. US President Donald Trump had announced that the cuts would be 10 to even 15 million bpd. The agreement eventually reached was a cut of around 9.7 million bpd. OPEC forecasts that global oil demand will fall by 6.8 million bpd on average in 2020, including a drop of 20 million bpd in April. The International Energy Agency (IEA,) however, forecasts a much steeper drop of 9.3 million bpd in 2020, including a plunge of 29 million bpd in April. On 20 April, US West Texas Intermediate (WTI) crude futures prices for May delivery closed at a mind-expanding -US$37.63/bbl, as traders frantically rid themselves of May contracts in preparation for the move to June contracts. Brent futures prices did not go into negative numbers, but they were pulled down and opened at US$20.89/bbl on 23 April.

Sub-Saharan Africa oil reserves flatten, production falls

Reserves grow then stagnate

Most Sub-Saharan Africa countries possess oil reserves, but proven reserves vary widely. The largest oil reserves are held by Nigeria, Angola, Sudan and South Sudan, Uganda, and Gabon….

Written by Nancy Yamaguchi, Contributing Editor.

This article was originally published in the May 2020 issue of Hydrocarbon Engineering. To read the full article, and other great technical articles in this issue, view the full issue here. You can also register to receive a free regular copy of the magazine here.

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