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Energy sector hit by COVID-19 demand shock

Oil and gas companies face new risk challenges alongside tumbling revenues

When we are in a world of having to pay people to take crude off your hands, then something’s gone wrong. But after the demand for oil fell sharply following the global outbreak of COVID-19, a domino effect was put in motion and, despite the Organization of the Petroleum Exporting Countries’ (OPEC) recent reduction in supply, the demand shock filled up most of the world’s available storage capacity. Although prices are starting to increase based on reductions in lockdown measures, many buyers and traders are facing challenging decisions to balance storage options with offloading unwanted oil.

In the space of a few short weeks in 2020, the US and global economy have undergone a radical shift. In response to stay-at-home orders, consumer spending has fallen to historic lows while commercial enterprises of all types have experienced major revenue declines. The energy sector, already buffeted by trade tension and political risks, is facing plummeting demand. With COVID-19 events fast-moving, energy companies are looking to put actions in place to respond to the financial challenges they face such as managing cash flow and liquidity, ensuring credit availability, and protecting their balance sheet.

Plug the cash drain

One of the biggest challenges of the plummeting oil price will be how to plug the cash flow drain. Companies have lost significant revenues and may be looking to cut back wherever possible. Securing financing, ensuring adequate lines of credit, assessing supply chain and risk financing options to provide liquidity for day-to-day operations, along with managing volatility in the risk profile of the business may help control the oil price impact.

Protect the workforce

From a workforce standpoint, businesses may be grappling with resourcing issues and issues with implementation of new measures such as workforce social distancing. To support organisations in their efforts to mount an effective infectious disease response, Aon’s Infectious Disease Response Talk Force has established a COVID-19 Response Site. It includes a Decision Making Framework to help inform response plans and to augment existing continuity strategies.

The energy sector is of course a high-risk business and where there are fewer people on site, this could impact the risk profile and may lead to an increase in accidents or events causing loss either in damage or loss of life. Physically moving skilled labour from site to site, during the pandemic is also harder so businesses are becoming reliant on resources already available in the country where they’re operating. This opens the door to using additional technology, for example can existing site operatives use cameras more extensively so operations can be managed remotely?

Targeted risk surveys

In this context of reduced access to sites, establishing accurate information to base risk presentations on to insurers may be challenging. Where, in a non COVID-19 environment, physical risk surveys would facilitate this, businesses may now wish to use technology and targeted remote risk surveys to focus on risk information that reflects their specific risk profile.

Accurate risk assessments in a volatile environment are likely to help businesses make informed decisions about the right mix of insurance and non-insurance options available to them. Making informed decisions as to the adequacy of insurance cover now may help businesses protect themselves. Any decisions however should consider the long-term impacts of change and the future need for access to limits and cover which may have been reduced in the short term.

Focused risk information will also help with operational effectiveness in areas like maintenance schedules and how a business is managing its operations in this downtime. We generally see an increased level of physical losses when there is change in the industry and the level of change today is unprecedented, which means a focus on areas of operational effectiveness and efficiency while not increasing costs and maintaining safety, is likely to be essential.

Business Interruption claims

Many businesses are likely to be looking to their insurers for help, but how far insurance may cover losses related to COVID-19 is not just a debate in the energy sector but also across industry in general. In relation to business interruption specifically, US state legislators are reflecting on whether the insurance market should be responsible for accepting such losses even where coverage is not afforded by contract.

The challenge with energy is that the effects of the pandemic will be felt differently dependent on operations and other factors for each business. Businesses may look to understand their potential losses, and keep close track of cost and revenue changes. This may enable them to build a potential claim.

Managing the changing risks

The pandemic is actively changing the risk profile of energy businesses. How those changing risks are managed and mitigated both now and as the pandemic starts to slow and life begins to return to ‘normal’, may be critical for every business’s long-term survival and profitability. The key to managing changing risks is to maintain focus and clarity, and use every tool to help the business safely navigate through this turbulent period.

For more help and advice on how to respond to the COVID-19 crisis, download Aon’s Decision Making In Complex & Volatile Times: Keys to Managing COVID-19 – a comprehensive framework to help organisations make the right decisions at the right time.

The information contained in this document is intended to assist readers understand COVID 19 issues and is for general guidance only.
This document is neither intended to address the specifics of your situation nor is it intended to provide medical, legal or specific risk advice. You should review the information in the context of your own circumstances (including further safety or medical information from credible sources) and develop an appropriate response. Each insurance policy must be specifically reviewed to determine the extent, if any, of coverage for COVID-19 noting that coverage may vary depending on jurisdiction and circumstances.
Whilst care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.