The ‘Pandemic’ problem – how world health impacts the Energy Industry

The ‘Pandemic’ problem – how world health impacts the Energy Industry


China is in trouble – and, potentially, so are we. Under the looming threat of a global pandemic, the impact of China’s curtailed industry is unquestionably having an impact across the energy sector. 

As Taqa actioned its offshore containment strategy to quarantine an offshore crew member in the North Sea, many other operators in the North Sea area were forced to curtail travel and impose restrictions on crew who have recently returned from known hotspots. From manufacturing and supply to manpower, logistics and energy demand, the challenges to industry are slowly, but surely, making themselves known in a variety of ways. 

As officials work to contain the spread of the virus, Global energy markets are reeling, prompting OPEC and allied producers to consider tightening supply as China, the world’s top consumer of oil and natural gas and Asia’s largest oil refiner, slashes energy output by 10%.

Why does it matter?

The question of a global flu-based pandemic is not a question of if, but when. In 1918, the Spanish Flu pandemic killed more than 50million people worldwide.  At this time, people were travelling internationally, but on a much smaller scale than today and the impact on individual industries was limited. 

Today however, Industry is, unquestionably, mobile – and this holds true for the Energy sector.  While the Coronavirus is, at this time, a mild pandemic by comparison, our workforce, tools, parts and products travel extensively and often, exposing the industry to the unpredictable, and uncontrollable impacts of global health emergencies.

Since first reports began circulating, oil prices have stumbled, liquified natural gas has gone undelivered, solar panel production has slowed and motor vehicle manufacturing has languished or halted completely. 

In early February, analysis by Rystad Energy suggested that "As the spread of the Coronavirus does not yet appear to be slowing down, concerns are rising among LNG sellers,".

Similar concerns were echoed in reports from IHS Markit which predicted a much larger impact on the global economy of Coronavirus than the previous SARS outbreak, due to China’s current position as second largest economy today – notably increased in importance from its previous position as sixth largest in 2003. 

The  IHS report said "any slowdown in the Chinese economy sends not ripples but waves across the globe," highlighting that China's oil demand constituted 7% of world oil demand 17 years ago, compared with 14% today. 

As concerns grow, reports from the International Energy Agency (IEA) predict that demand is set to fall year-on-year in Q1 for the first time since the 2009 financial crisis, while OPEC has also cut forecasts through 2020. 

With Brent crude, down roughly 15% since first reports of the virus spread, global commodity trader Trafigura Group predicted cuts to global demand growth by approximately 300, 000 barrels per day (bpd) to around 1million bpd. 

IHS Markit also predicted that industrial energy demand may decline by up to 73Billion kWh. This cut equates to around 1.5% of industrial power consumption in China, but as the world’s largest consumer of electricity, this loss can be equated to the power used by Chile, a South American country with a population of 19.12million people, underscoring the scale of the disruption. 

While supply and demand are key economic factors, the threat to the workforce is also a humanitarian concern. With the first case now confirmed in Africa, one of the fastest growing energy economy regions, operators and service companies working in this area, will need to consider how best to protect their workforce. 

As China remains a global manufacturing giant, let’s take a look at some of ways which Coronavirus is impacting the energy sector at this time. 


Early reports of reduced travel and economic activity in China pushed down oil prices to their lowest level in a year.  OPEC+ Group struggled in late January to agree deepening cuts to joint production in efforts to tighten markets, with Russia agreeing in principle, but refusing to sign off on the deal at that time.   Further output cuts are expected to be announced at the OPEC+ Group meeting in March, and analysts are optimistic of Russia’s support this time. 

"The Russians have pretty much signalled that everyone is on board for OPEC+ delivering deeper production cuts," said Edward Moya, senior market analyst at OANDA Corporation in New York adding "As long as the Coronavirus does not show strong signs that the spreading of the virus is intensifying, WTI crude could make a run towards the mid-$50s," 

This optimism of deeper cuts from the worlds biggest producers  fed industry confidence and by mid February, Brent crude increased 32 cents, (0.6%) to $56.11 a barrel, with United States' West Texas Intermediate crude oil (WTI) up 14 cents to $51.31 a barrel.

OPEC’s lowering of its 2020 demand forecast by 200,000bpd, citing the Coronavirus outbreak in China as the world’s largest  crude consumer, contributed to a steadying of pricing across the market.  

However, Price Futures Group appear keen to manage expectation around this. Oil Analyst Phil Flynn is quoted in US media saying that traditionally, the Russians are known for playing “hard to get” and that there is a seasonal element to these discussions, due to the fact that Russian Oil export drops over winter, while they retain it for domestic use. This may make the Russians more amenable to a deal but raises questions regards what the Plan B might be, should they refuse, saying;

"If that's the case, now you're going to be talking about 500,000 bpd of oil more on the market, and that's definitely going to depress prices again." 

Wind & Solar:

Simply put, China is the world's largest solar equipment manufacturer, and consultancy Wood Mackenzie has reported that work at several module plants is unlikely to resume until late February or later.

Around 90% of the silicon "wafers" used in the United States originates in China, so it is inevitable that these stoppages will impact the solar Industries word wide. 

South Africa in particular, is bracing for some tough times ahead. The South African solar industry has been booming over the last two years with several mega-projects underway, many of which rely on the global supply chain for the provision of photovoltaic (PV) systems – where China is a significant Industry player. 

A significant liability, Africa’s reliance on the Chinese market is a source of concerns for Investors, particularly in Kenya, South Africa and Nigeria.  

Investment banking firm ROTH Capital warned that glass for PV modules and a shortage of solar wafers is likely to drive price increases of components in the solar supply chain in the near term, due to limitations on China’s current production.  

ROTH also noted that further impacts to the supply chain may result from the extended work stoppage in the eight key solar manufacturing provinces, most notably Jiangsu province, home to a number of ‘Solar Module Super League’ (SMSL) member’s major manufacturing hubs, including  LONGi Group, Trina Solar, Canadian Solar and JA Solar.

Continued stoppages are also being monitored by US wind and solar agencies. While many South East Asian companies provide many of the solar panels used in US installations, the raw materials to manufacture them are procured from China. 

Analysts say that, to date, the stoppages haven’t had a dramatic effect on suppliers of wind and solar parts but, this may well change if quarantined and factory closures continue to cause disruption. Due to its reliance on China, the effect of this will be more pronounced in solar, in comparison to the supply chain for wind. 

The effects of any shortfall are likely to take a few weeks to show themselves as it is likely that producers have stockpiled enough raw materials to meet supply over the next few weeks. However, should the pandemic increase in severity, manufacturers may not be able to produce, impacting price and availability. 

Wind is expected to fare slightly better due to a more geographically diverse supplier base. Yet, Kim Clifford, senior Credit Officer at Moody’s Investor Services cited Vestas Wind Systems as one of the most exposed wind manufacturers, due to the fact that they manufacture wind blades and other components within the eight affected regions at the epicentre of the outbreak where the company has around 3000 employees. 

"We all appreciate if China is remaining closed for weeks or even worse, months, then I think it is the whole world that will have a pandemic force majeure," said CEO Henrik Andersen, speaking on a call with US Journalists.  

Industry reports suggest that other large wind companies are keeping a close eye on the outbreak in attempts to predict its long term impact, and some, such as Siemens Gamesa Renewable Energy are starting to develop India as a global hub to reduce their reliance on China. 

Natural Gas/LNG:

Perhaps the hardest hit sector at this time, the outbreak has caused a number of Chinese companies to declare force majeure on gas production, defined as a set of unforeseen or unpredictable events which would hinder fulfilment of the original contract. 

Bloomberg reported that CNOOC has declined to accept cargoes of liquefied natural gas because its ability to import the fuel is inhibited, a trend which may well continue as Chinese companies face a choice between stockpiling the LNG offshore, at significant expense, or alternatively, refusing deliveries outright.  The impact of any cancellations will ultimately have a direct impact on the bottom line of US exporters of LNG, predicted Neil Bhativa, Associate Fellow for Energy and Economics at the Centre for New American Security. 

"They are going to have to try to find, if they can, a different market for it, and it'll probably be at a lower price than what they had initially contracted out," Bhatiya said "They're basically trying to chase a price level that keeps going down as more and more orders are cancelled."

Further complicating the issue is the unknown severity of the virus and how far and wider it may spread. 

Revising it’s growth estimate for expected Chinese LNG demand for 2020, Rystad Energy limited growth to 4.7% when compared with 2019 figures – a notable difference from their earlier estimated rise of 10-13% 

"If more Chinese companies cancel or defer importing LNG volumes from term contracts, and if the spot price then falls further, sellers may face even greater pressure from buyers wanting to renegotiate existing contracts or hesitating to sign new ones," the report said. 

Counting the Cost.

As the death toll continues to rise, there are currently 70,548 confirmed cases at time of writing and while the industry attempts to mitigate the economic impact, the Coronvirus remains first and foremost a humanitarian concern. 

With such startling levels of infection, the global nature of the energy industry underscores the need for clear-headed preparation, education and communication. 

The 2014 Ebola outbreak, which bore an estimated cost of $53billion to the affected economies, had the potential for a “cataclysmic” impact on workers families and communities in West Africa, according to the Journal of Infectious Diseases. 

As a result, many international companies have been forced to consider their preparedness for dealing with a major pandemic. This outbreak, in conjunction with the 2014 downturn in Oil & Gas, made health security a strategic priority in a now streamlined workforce. As businesses continue to compete for global growth, so to, will the number of mobile workers on international assignments – and with it, an increased risk to workers and employers. 

On a positive note, a swift reaction from industry at various stress-points in recent years suggests both preparedness and resilience to manage the increasing number of health threats it faces but it’s clear that ensuring long term health security will be an ongoing challenge for the sector and it’s workforce. 

What mitigations affected countries will implement in the aftermath and the impact this may have on workers rights and movement in troubled times remains to be seen while the question of how long, how far and how wide, echoes around the world. The answer, however, is less forthcoming.

Published: 05-03-2020

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