Energy industry and COVID-19 (coronavirus): strategising for the ‘new normal’

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The world has changed. The novel coronavirus (2019-nCoV) has seen to that. Safeguarding and stabilising operations, liquidity, people, supply chains and markets has been the overwhelming first priority. Now, companies must start thinking strategically about how they will adapt as the pandemic and markets evolve. 

As well as affecting countless lives, COVID-19 has unleashed a devastating blow to the global economy, disrupting supply chains while choking off demand. Electricity demand is down significantly in many territories and the market for transport fuel has shrunk dramatically as planes are grounded and movement restricted. 

Even for those who feel able to predict the passing of the storm, counting on a quick return to business as usual is not a viable strategy. The shock of the pandemic on previous assumptions and future behaviour can’t be ignored even if there is a sharp V-shaped recovery. A slower U-shaped recovery or a longer L-shaped recession will have even more profound implications. Whatever the path forward, the world will be different and companies need to plan for a new normal.

For companies in all parts of the energy, utilities and resources sectors, it will be vital to combine effective scenario-planning with an examination of how different developments could affect their business in the short, medium and long term. Whatever the scenario, we see a number of issues that will shape strategic thinking.

Prepare for further volatility and risk

As companies and wider society come out of lockdown measures, there will be no room for complacency about the upturn. Until a vaccine is developed, which isn’t likely until 2021, there could be continued restrictions and the possibility of a second wave of infection outbreak. There is also a real risk of the virus mutating.

Companies will therefore need to build a high degree of flexibility and continued resiliency into their short- and medium-term strategising. They will need to be ready to adjust operations up and down and not assume that recovery will be a continuous and linear process. Human resource models that provide 60:40 flexibility around a 60 percent permanent core are likely to gain ground. Consideration should be given to which aspects of the strict separation, hygiene, control and business resilience measures adopted at the height of the crisis need to be maintained and stepped up or down as needed.

Focus on security of supply

Security of supply, a familiar theme in the energy and resources sector, has much wider relevance in a world living with COVID-19. As the crisis unfolded, companies had to move quickly to secure supply chains and manage component inventory. As the outbreak begins to be contained and economic activity revives, many will be re-evaluating their supply chain resilience.

In production sectors such as chemicals and metals, we anticipate a strong sentiment in favour of more localised and shorter supply chains. The risk/return ratio of global supply chains, with their traditional labour arbitrage and other factor cost advantages, are likely to have shifted when viewed through a COVID-19 lens. For example, we may see the sourcing of many precursors and starting materials being relocated closer to the final stages of production and end-user markets.

Plan for a new sense of vulnerability

COVID-19 has reminded the world of its vulnerability and heightened the awareness of the public and wider society to global risks. This in turn could have an impact on discussions about other threats such as climate change. Across the board, companies will want to examine their approach to risk with a fresh eye and consider what measures are needed to derisk their business models.

As a minimum, companies should use their pandemic experience to inform wide-ranging reviews of their business continuity and crisis management strategies. Some companies will need to go further and implement structural measures to reduce risk. In the oil and gas sector, for example, high cost producers that have been left exposed by the collapse in the oil price may need to turn to collaborative partnerships or consolidation as way of bringing costs down.

Accelerate new ways of working, automation and digitalisation

The experience of COVID-19 will almost certainly accelerate momentum towards new ways of working, automation and digitalisation. Companies that are further along the curve in digitising their operations have already benefited from greater built-in resiliency during the crisis, reducing dependence on human resources. Greater investments in these areas will equip companies to maintain better business continuity in their supply chains, operations and customer management, reducing the load on their workforces.

Technological transformation will also have been given a boost by the experience of virtualisation and new ways of working by staff during the pandemic lockdown. It is likely to accelerate the move to a more mobile workforce, able to work virtually and at distance. Companies will want to consider what worked well during the crisis and look at the opportunities for future workforce productivity and flexibility.

Consider the implications of behaviour change

In the past supply and demand curves tracked each other. COVID-19 has forced a divergence with demand forced downward. What will demand look like as the world emerges from COVID-19 restrictions? What will be the impact of behaviour change? Will people not completely return to previous habits? It is not hard to imagine, for example, that companies will rethink their approach to business travel and workforce mobility with consequent impacts on demand for transportation fuel.

On a wider level, policy-makers and the public will reflect on the impact of lockdowns on reduced traffic, pollution and CO2 emissions. In many regions, they will have seen how renewable sources of electricity were able to supply 100 percent of demand. In others, it might be clear that the economics of individual power plants may no longer be viable. Will these experiences give added momentum to moves to deliver energy transformation? Or might a global recession push climate change and sustainability down the list of concerns?

Industries

The challenge from the coronavirus for oil & gas companies has been heightened by the oil price collapse and continuing price uncertainty. In response, the Opec+ group has announced the world’s largest-ever supply cut deal, by 10m barrels per day. But the longer COVID-19 policies restrict the movement of people, the more likely new travel, working and consumer behaviours become the new normal. In turn, the more likely a temporary drop could become long-term structural demand destruction with further consequences for oil market stability.

All parts of the energy value chain are affected - upstream, midstream, downstream, and service companies. As well as implementing COVID-19 safety measures, companies need to pull all the traditional downturn levers, such as reductions in capital expenditures and cash conservation. The implications of current hedging positions need to be carefully evaluated and future hedging, procurement and risk mitigation strategies will need to be based on effective scenario and demand curve data analysis. High cost producers may need to go further and consider ways of partnering or delivering consolidation that can enable them to reduce their cost base.

Keeping the power flowing and the lights on during the coronavirus crisis is the number one challenge for power and utility companies. Pandemic protection measures have reduced workforce availability and necessitated strict hygiene and separation protocols to maintain operations. Reduced demand has brought its own technical challenges with system operators needing to manage voltage and consider the implications for forecast algorithms as well as managing reactive levels to avoid dangers such as reactive shunts at distribution levels.

As the crisis evolves, power utility companies need to ensure they have plan-ahead strategies in place to examine various scenarios that might unfold in different timeframes so that the organisation is ready for fast decision-making. Business continuity and preparedness plans will need continual review to ensure that operations and infrastructure are properly supported. More than ever, it will be important to work closely with governments and regulators to consider the implications for energy affordability, sustainability and security of supply.

The combination of the coronavirus crisis and the oil price crash has meant a very differential impact on the chemicals sector. Companies with upstream business models that depend on an oil price at moderate levels have been hit hard. Depending on their end-market, companies with more downstream product positions have fared better. Some chemical segments have even had boom in sales, for example those producing disinfectants, antiseptics and personal protection materials.

The impact of the coronavirus crisis is likely to see more moves to derisk business models through portfolio diversification and further moves downstream. Companies will step up their efforts to be closer to understanding end user requirements and to respond by developing add-ons such as services, formulation knowledge, and digital enhancement. The impact of the crisis on some parts of the sector is likely to spur mergers and acquisitions activity among corporate buyers as well as activist investors.

Mining

COVID-19 has impacted miners in different ways. Those with heavy dependence on enduring Chinese demand were the first affected, with shipments deferred or delayed, compounded by downward pressure on pricing. Conversely, they are also expected to be the first to benefit from a ramp-up in Chinese manufacturing activity.

But this assumes they can keep their mining operations protected from the direct impacts of COVID-19, especially on their workforce. For many mines, physical isolation immediately became a great geographical advantage, less so for those who depend on labour from afar, specialised or otherwise. Movements of workers between locations creates heightened risk of infection and, in some countries, lockdowns have drawn production to a halt.

Going forward, many mining companies will look to accelerate automation projects in an effort to further derisk their operations. Others might see greater advantages, especially in remote locations, of taking the opposite tact - reverting to a local, self-sufficient workforce, reducing dependence on contractors and outsourced services.  Business continuity plans across the globe built on the premise of being able to fly in specialised support when a crisis emerges will need to be re-written.

Metals

Metals producers have been hit by shutdowns and reduced demand from downstream consumers as well as having to manage the direct consequences of COVID-19 on their own operations. Uncertainty surrounding the duration (or even a deepening) of these conditions can make it difficult to see how a recovery will play out. Companies will need to ensure their forecasting models adequately reflect these unprecedented conditions.

A major challenge for metals producers is that smelting and refining plants operate continuous production processes that cannot be readily stopped without damage. There is a real possibility that the crisis may result in debt restructuring or bankruptcy for some downstream end-users and for metals producers themselves.

Decisions on whether metals manufacturing companies and their major end-users are nationally classified as “essential industries” may determine the level of impact on the industry. Meanwhile, metals companies are shoring up their cash liquidity and looking to short-term borrowing to help cover operating costs.

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Jeroen Van Hoof

Jeroen Van Hoof

Global Leader, EU&R and P&U, Partner, PwC Netherlands

Tel: +31 0 88 792 1328

Niloufar Molavi

Niloufar Molavi

Global Leader, Oil and Gas, Partner, PwC United States

Tel: +1-713-356-6002

Dr. Nils Naujok

Dr. Nils Naujok

Global Leader, Chemicals, Partner, Strategy& Germany

Tel: +49-30-88705-855

Jock O’Callaghan

Jock O’Callaghan

Global Leader, Mining and Metals, Partner, PwC Australia

Tel: +61-3-8603-6137

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