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Energy Risks in the Time of Coronavirus

Energy Risks in the Time of Coronavirus

(lkin Guliyev | Dreamstime.com)

By Thursday, 07 May 2020 11:30 AM Current | Bio | Archive

Just when you thought it couldn’t get weirder, it did.

The oil and gas business wasn’t having a good year. Supply was outpacing demand, leading to depressed stock prices. Investment capital was becoming increasingly scarce as investors shunned the sector for three reasons: eroding confidence in the future of fossil energy; poor market fundamentals; and a preference for returns over growth.

All of these factors were hurting overall performance in early 2020, well before the onslaught of the COVID-19 pandemic and price collapse.

Then, within a few short weeks, an almost unthinkable double whammy. First, the global pandemic puts activity at a standstill in much of the world. Complete demand destruction followed as planes stopped flying, people stopped driving, and trucks, trains and ships lay idle. At the worst possible moment, a dispute arose between Saudi Arabia and Russia over the OPEC+ production cuts. While the dispute was temporarily settled and new cutbacks went into place, it was too late, and could not stop West Texas Intermediate crude oil prices from collapsing to below zero due to the massive loss of demand resulting from the pandemic.

As energy markets remain stunned by the impact of these events, it is fair to ask the question: could anyone have seen this coming?

Sure, these events are black swans and together represent a super black swan, but we do try to anticipate black swans and plan for how we react to them. Risk management tools and scenario planning are used throughout the energy and financial services industries as a way to anticipate events that may occur, determine their likelihood and potential impact, and anticipate whether appropriate monitoring and mitigation measures and tools are in place.

While the sequence of events that occurred this year were extremely complex and difficult to anticipate, there were signs that could be and were detected. On the non-pandemic related side of the oil market collapse, there were many signs. Every quarter, Cornerstone releases a US Energy Issues Matrix, which identifies and outlines the most pertinent risks for the industry. Low commodity prices, threat of recession, lack of investment capital (seeking oil and gas), trade and tariffs policy, geopolitical tensions (Middle East, Russia, China), and OPEC/non-OPEC interactions were all prominent issues on the Q4 2019 matrix. Many looming signals, news reports, investor reports, and earnings calls portended rough times ahead for oil and gas.

These signals also showed a trend of investor dollars moving away from fossil energy companies based on industry’s association with climate change, a growing focus from investors on returns over growth, and low commodity prices and slowing demand growth. The growing tensions between Russia and Saudi Arabia over production cuts, and their frustration with the market impact of US shale producers, were all well-documented and anticipated. A massive collapse in demand from the pandemic was not.

So, would it have been remotely possible to anticipate this confluence of events? There certainly were early signals that a global pandemic may occur. It is believed that the first cases in China occurred in mid-November 2019. Several cases of a serious illness were reported in Wuhan in late December, and on December 27, doctors from Wuhan reported to Chinese health officials that a novel coronavirus was causing the disease. By then, it had infected more than 180 individuals. US intelligence began to learn about the virus in January and on January 20, the US reported its first case. On January 31, the Trump administration suspended entry into the United States by foreign nationals who had traveled to China in the past 14 days.

While just a few months ago most people would have had a hard time getting their minds around the events that would soon engulf the world, some had been warning for decades that such a global pandemic would eventually happen.

The impacts from the pandemic and oil price collapse stress the need for better risk management and scenario planning. Governments, banks, and industry all perform exercises and implement processes to identify and analyze risk so that contingency and mitigation plans can be developed. Rigorous internal processes, better tools, and data analytics give us greater ability to analyze risk and react in an organization’s best interest. Now is the time to hone these processes and tools to better improve our capacity to identify and avoid risk.

We may not have been able to completely anticipate the super black swan and avoid all of the damage that has occurred over the past few months, but we might have been able to lessen the damage. We can’t let these events slow down our pursuits of excellence. To the contrary, governments, industry, universities, and our society need to perfect our ability to identify, analyze, and mitigate risk. Continuous improvement, enhanced data analytics, and the human spirit will help us get there.

Jack Belcher is senior vice president of Cornerstone Energy Solutions and advises energy, transportation and financial services clients on government relations, regulatory affairs, risk management, ESG management, coalition building and stakeholder relations. He is also managing director of the National Ocean Policy Coalition.

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JackBelcher
The impacts from the pandemic and oil price collapse stress the need for better risk management and scenario planning.
risk, time, coronavirus, oil, crude
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2020-30-07
Thursday, 07 May 2020 11:30 AM
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