Covid-19 impacts on Energy and

Utility players

April 2020

Global Publication
 COVID-19 spread

The novel COVID-19, classified as a pandemic by WHO, revealed a rapid

global spread & high infection rates with ~600k reported cases worldwide
Global distribution of COVID-19 cases COVID-19 statistics
Cumulative new cases, ‘000
600 (22 Jan – 27 Mar 2020)
500

Pandemic
400

PHEIC
300
200
100
0
Cumulative deaths, ‘000
30 (22 Jan – 27 Mar 2020)
25

Pandemic
20

PHEIC
15
10
Number of cases (as of 27 Mar)
5
> 70,000 15,000 - 29,999 1,000 – 4,999
0
30,000 - 69,999 5,000 – 14,999 <1000 13-Jan 27-Jan 10-Feb 24-Feb 9-Mar 23-Mar 6-Apr
Source: Arthur D. Little, World Health Organization (WHO), World Bank
Note: PHEIC – Public Health Emergency of International Concern (declared by WHO)
Pandemic – declared by WHO
2
 COVID-19 impact

On the short term, the Covid-19 crisis has significantly impacted most
energy players recording up to -25% drop in electricity demand
Electricity demand
January 2020 – March 2020, in GW, Global, Maximum load per week
Electricity demand
change (%) between
90 January – March
84
81
80 74 73 -12%
78
70 74
64
71 -9%
58
60
51 50 -25%
50 44 44 44
38
0%
40
40
35 35 -25%
30
20 -13%
13 12
10
10 -21%

0
06/1 - 13/1 - 20/1 - 27/01 - 03/2 - 10/2 - 17/2 - 24/2 - 02/3 - 09/3 - 16/3 - 23/3 -
12/1 19/1 26/1 02/02 09/2 16/2 23/2 01/3 08/3 15/3 22/3 29/3
Source: Arthur D. Little analysis, Elia, RTE, Terna, National Grid, REE, Agora, CENACE
Note: UK tool confinement measures very late (end of March) compared to other EU countries
3
 COVID-19 impact

We note a drastic power spot prices decline all throughout the world

Power spot prices UPDATED 3/04/2020

February – April, EUR/MWh, Global markets
EUR/MWh Difference1
(%)
55
-19%

45 -22%

35 -32%

25 -33%

15 Nordics -72%

-28%
5
0 -24%

-10 -12%
27/01 03/02 10/02 17/02 24/02 02/03 09/03 16/03 23/03 30/03 06/04
-9%
EPEX SPOT DE-LU MIBEL2 Nord Pool4 EPEX SPOT BE MEXICO SPOT
EPEX SPOT FR IPEX3 EPEX SPOT NL N2EX UK Brazil SE Ref5 SP15 US ref -45%

Source: eia, ice, GME (Gestore Mercati Energetici), Nord Pool, REN (Sistema de Informação de Mercados de Energia), Elexys, CENACE, Arthur D. Little analysis -31% 6
Notes: 1) Difference between average of first week of February and average of first week of April (3 days), 2) Spain and Port ugal, 3) Italy, 4) Nordics incl. Sweden, Finland, Norway,
Estonia, Latia, Lithuania, Denmark, 5)Weekly LD Spot price data in Brazil. exchange rate december 2019, 6) Data from 24 February up to March 24 2020
4
 COVID-19 impact

Demand forecasts change every week, but average global reductions of

more than 10 MBD are expected for 2020
Economic Growth
Aviation (7MBD) Road (47MBD)
(40MBD*)

Peak Impact on jet fuel demand Peak Impact on road fuel demand GDP annual growth rate
MBD MBD 2,4%
1,6%
1%
Q1 2020 Q2 2020 Q3 2020 Q4 2020 1Q 2020 2Q 2020 3Q 2020 4Q 2020
0
-0.3 -0,9%
-0.5
5 -1,9%
Oil demand annual decrease MBD
-1.1
-0,25
-1.5 11 -0,6
-0,8
-1

-2,5
OECD IMF UN best UN worst Fitch
scenario scenario Ratings
25

0,85 MBD 10 MBD 0,25 - 2.5 MBD

annual average annual average annual average
*Oil demand for non-transport activities
Source: Arthur D. Little; IATA; OECD; IMF; UN; Fitch Ratings; Rystad; Goldman Sachs. 5
 COVID-19 impact

On top of Covid impact, oil price has been affected by Russia/Saudi Arabia
disagreeing at OPEC and increasing oversupply
Brent Spot Price Dollars per Barrel
(From January 2, 2020 to March 30 2020)
Covid-19 Oil Price War
80
◼ Russia did not accept
-72% Saudi Arabia production
70 Russia deny
support to OPEP+
new agreement
decrease proposal after
60 negative forecast from
-23% Oil War EIA for global demand
First Covid-19
50 notification in because of COVID and
Wuhan WHO declared VS Saudi Arabia declared to
Global Public-

40 Health Emergency increase its exports

First infected in
the US Death Toll by Covid- ◼ WHO declared global
30 19 surpasses SARS
pandemia and crude oil
oversupply further
20 WHO declared
Covid-19 Global
Pandemic
impacted prices
10 ◼ OPEC would decide
January February March April soon to cut production
after over 70% price
drop
Low price supports Saudi Arabia intention of increasing its market share but would finally accept to cut
production to support an acceptable price to balance its national budget
Source: Arthur D. eia, Forbes, World Health Organization, Press release, El País 6
 COVID-19 impact

Natural gas prices have also dropped significantly, with the LNG sector
being greatly impacted, reducing its expected growth in the coming years
Monthly Brent vs Natural Gas Henry Hub (HH) Price

USD/ USD/
Barrel Brent Prices Gas Prices MMBTU ◼ Economic crisis impacted on industrial
80 6 demand for gas and gas-fired power globally
70
5 ◼ Henry Hub prices are now below
60 $2/MMBTU and JKM futures prices are
4 below $3/MMBTU
50
40 3 ◼ LNG liquefaction already has excess
30
capacity, with oversupply and depressed
2 prices, even before COVID-19
20
1 ◼ Major capex cuts and the deferral of
10
several multi-billion dollar LNG projects
0 0 (i.e. Australian) are already announced. Shell
19- 19- 19- 19- 19- 19- 19- 19- 19- 20- 20- 20-
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar* for example is walking away from the Lake
Charles gas export project.
Source: ADL Estimates, EIA 7
 CEO interviews

ADL run interviews with CEOs from Energy and Utility companies in order
to investigate main impacts and implications ….
“Long-running project business is
“Supply of digital tools needs to
“Monitoring spread in relevant areas, “Operations planning process moved going steadily, however new
be ensured very early on”
including number of confirmed cases, trends, to daily from monthly. Total demand, project acquisition is a
policy development, etc.” product demand mix, storage restrictions & challenge at the moment,
margins conditioning operations” however we expect rather delays “We would never have been able to
than cancellations” test and experiment the
digitalization process in such a
massive way ”
“ We learn every day. We cannot plan for
any one scenario” “Digital shift is happening, and
people learn quickly”

“There is no time to waste – the time to act is “This crisis could offer large
now, better to make a mistake than to opportunities to digitalize the
wait and lose time” customer interface, e.g. gas meters can
be more rapidly replaced by smart meters”

“For strong businesses with a long-

“You need to show solidarity with the “Definition of organizational processes term view, this may open up a
worst affected areas. Show that you are will help people to understand what needs lot of M&A opportunities”
taking your social responsibility. And do not to be done” After
neglect people at home, who are the crisis we can fast track infrastructure
psychologically affected” projects, reboot the economy, create jobs, improve
“We are moving from smart competitiveness, and make Europe greener with a
working to smart leadership” multiplier effect on GDP …this crisis can be used to
reboot the economy, create jobs, improve
competitiveness, and make Europe greener

Source: Arthur D. Little’s “Leading businesses through the COVID-19 crisis - CEO Calls”, Selection of Oil and Gas company quotes from a total of 300 Quotes

8
 CEO interviews – Field force management

… safety procedures and digitalization are key actions for infrastructure

player in this confinement context
Remote construction sites will likely go through a gradual shut down for the coming 3-4
weeks A list of prioritized services has been defined, in terms of types of
services and frequencies that must be delivered. In addition, use of
remote management systems increase

All jobs that are not necessary have to be postponed –

only priority problems are being addressed (which are key in
order to keep the businesses and services running)

Safety for all kind of operation workers – use of personal

protective equipment and smart working methods

To safe guard the continuity, the company

purchased emergency accommodation boxes and
put them into courtyard by the control room,
tested all colleagues in the dispatch team, and
requested that they went into voluntary
quarantine at the work place, where shifts went Separation of control rooms and people working in control
up from eight hours, to twelve hours rooms (total number is lower than in normal condition)

I-Pad and Artificial intelligence …this has been a very efficient measure to cut down travel time. Management will use the coming 2-3 weeks to continue to review scenarios,
Maintenance workers have gone from an average of 3 jobs per day to almost 5 and in a month or two they will review capex scheme again

Source: Arthur D. Little’s “Leading businesses through the COVID-19 crisis - CEO Calls”, Selection of Oil and Gas company quotes from a total of 300 Quotes

9
 COVID-19 impact

In the recovery period (end 2020), Covid-19 mainly implies problems and
threats for Utilities, with quite limited upsides or opportunities

Network operators End-user service providers Generation

Est. size of
impact
(illustrative)

▪ Shortage of external contract labor ▪ Shortage of external maintenance labor as

▪ Potential shortage of materials (modules or Limited impact well as solar and battery supplies (if
Supply parts) given OEM plant shutdowns extended confinement and/or rebound)
chain

▪ Field force shortage and safety, with effect &

policy on work execution (conditions, ▪ Field force safety: Adaption to new working ▪ Planned outages of power plants at risk
Operations manpower) conditions policies and standards
▪ Investment plan : capex postponed

Limited impact ▪ Digitalization of customer interaction Limited impact

Sales &
Distribution

▪ Lower customer service score given ▪ Cash collection issues

▪ Declining power prices related to a decline
complexity of on-site work (e.g. new of demand
Customers connections, repairs, outage mgt, …) ▪ Tightening C&I demand
(incl. demand) during recovery period

Regulatory uncertainty impacting energy transition projects, tenders, tariff regulations,…

Source: Arthur D. Little

Critical High negative Moderate Low negative

Limited impact Positive impact 10
impact impact negative impact impact
 COVID-19 Impact & Mitigation per Segment – Network Operators

Network operators will have to reflect on their sourcing of labor and

critical material, as well on their field force safety
Network operators
Mitigation actions / opportunities
potential impact

▪ Explore further distance-based asset condition monitoring and intervention (e.g. robotification
Shortage of external
applications, sensor monitoring, drones, etc) and increase roll-out speed
1 maintenance labor (if extended
▪ Put in place concurrent planning/scheduling with suppliers with focus on capacities and risks
confinement and/or rebound)
▪ Transform sourcing approach towards longer term multi-supplier and multi-geographical setups
▪ Coordinate critical spare parts with industry peers (transmission & distribution)
▪ Set up mid/long term planning for requirements of specific critical materials together with
Shortage of material supply strategic suppliers and own supply chain teams
2 for critical infrastructure ▪ Increase supply chain resilience through geographic diversification of supply chain and introduction
of supplier development models increasing sourcing flexibility
▪ For selected materials, launch searches for alternative backup suppliers and secure supply
▪ Design mitigation action plan for working conditions for employees working on site, including
Field force safety:Adaptation supply of personal protection equipment and flexible work policies to decrease interactions
3 to new working conditions between employees
policies and standards ▪ Further push for digitization of field force related activities to minimize the need for on-site
presence (e.g. through sensors, tablet equipped with AI, drones)

▪ Set up specific risk management program for each large capex program, including
Investment plan review: delay
interdependencies between programs as well as substitutes in case of failure to deliver
4 of execution of infrastructure ▪ Develop scenario analysis in order to recover postponed investments as much as possible
projects ▪ Pro-actively manage regulatory stakeholders regarding capex programs, reducing permitting
processes and focusing on energy transition

11
 COVID-19 Impact & Mitigation per Segment – End User Service Providers

On medium term, end-user service providers should work on their

customers loyalty and improve their digital offerings
End users service providers
Mitigation actions / opportunities
potential impact

▪ Increase customer loyalty through tailored communication during crisis and in recovery period
▪ Set up a “customer crisis support” team which assesses their (and your) risks (and
Tightening C&I demand
1 during recovery
opportunities) and giving your customers “room to maneuver” - staffed with persons
experienced in originating solutions and familiar with national “rescue programs” for financial
aids, tax and legal measures

▪ Offer flexible solutions and short term hedging solutions, e.g. extended term contracts at
2 Cash collection issue
more affordable rates
▪ Enhance risk analysis process and manage financial exposure (especially for C&I segment)

▪ Further push for digitization of customer operations (contact center, on-line payments, APP,
Digitalization of customer
3 interaction
etc)

▪ Post crisis, client may want to increase energy efficiency and decarbonize the supply chain
Portfolio of services not including energy and become more flexible in the access of services (e.g. digitalized services)
4 adapted to new behaviors ▪ Energy service providers should develop their service offerings to respond to that change of
behavior and envisage new revenue streams

12
 COVID-19 Impact & Mitigation per Segment – Generation Asset Owners

Generation asset owners will want to ensure long term contracts with
customers while enlarging options for sourcing of critical material and labor
Generation asset owners
Mitigation actions / opportunities
potential impact

▪ Explore further distance-based asset condition monitoring and intervention (e.g. robotification
Shortage of external applications, sensor monitoring, drones, etc) and increase roll-out speed
1 maintenance labor ▪ Put in place concurrent planning/scheduling with suppliers with focus on capacities and risks
▪ Transform sourcing approach towards longer term multi-supplier and multi-geographical setups

▪ Set up mid/long term planning for requirements of specific critical materials together with
Shortage of renewable energy
strategic suppliers and own supply chain teams
material + battery supplies (if
2 extended confinement and/or
▪ Increase supply chain resilience through geographic diversification of supply chain and
introduction of supplier development models increasing sourcing flexibility
rebound)
▪ For selected materials, launch searches for alternative backup suppliers and secure supply

▪ Review and adapt outage planning to limit impact on availability of generation assets and limit
3 Planned outages at risk impact on revenues and customer inconvenience

Declining power prices

▪ Moving into Origination business ensuring long-term offtake of energy by commercial and
4 related to a decline of
industrial customers
demand

13
 COVID-19 Impact & Mitigation per Segment

All industry segments are impacted by volume and price drop, financial
collapses, supply chain disruptions and limited availability of staff
Field Oil Field Transport &
Refining
Operations Services Distribution
Est. size of
impact
(illustrative)

▪ Spare parts especially from ▪ Already contracted crude

China will be critical needs to be re sold ▪ Some production halt
▪ Storage restrictions for because of lack of storage
oversupply ▪ Drill bits / tools limited ▪ Storage restrictions for
Supply impact given low activities crude, intermediate and final downstream
chain for new wells / exploration products

▪ Exploration / appraisal / ▪ Limited to minimum staff

▪ Manpower at minimum new wells will halt ▪ CAPEX initiatives and ▪ Limited to minimum staff
possible level ▪ CAPEX initiatives reduced
▪ Well intervention remain turnaround stopped
Operations ▪ Operators to prioritize steady especially for rig less ▪ Daily vs. monthly or stopped
assets activities optimization

▪ Some production assets ▪ Contracts will be

cannot cover cash costs ▪ Low utilization rates drive ▪ Lower revenues because of
renegotiated if not low to negative margins for volume drop
▪ Negative economics for cancelled
some shale, deepwater and some locations and ▪ Financial stress for retail
▪ Local OFS players will be configurations dealers requires support
Price/Margin Canadian operations favoured over international

▪ High level of oversupply ▪ Demand will slow down ▪ Demand decrease under
▪ Crude traveling far until operators stabilize the minimum production level ▪ Demand decrease until
▪ Penalization for not strategy for some refineries isolation ends and
Customers standard crudes ▪ Brownfield activities will be ▪ Demand mix change towards economy recovers
(incl. demand) dominant heavier fuels

Critical High negative Moderate Low negative

Source: Arthur D. Little Limited impact Positive impact 14
impact impact negative impact impact
 COVID-19 Impact & Mitigation per Segment

Field operations face a drastic change on their economics and requires

reengineering of exploration and production plans and investments
Field Operations
Mitigation actions / opportunities
potential impact

◼ Look for long term capacity contract if low cost production

Downstream storage
1 restrictions
◼ Swap crude and/or storage among different locations

◼ Consolidate current and future shutdowns for 2020 and optimize plans
2 Potential staff limitations ◼ Review and prioritize operating assets, new developments, and production enhancement
programs

◼ Reduce operational runtime to a minimal in certain assets to avoid unplanned shutdown

◼ Close monitor of point forward cash flow and economics by field/asset/project
Tight or negative economics ◼ Take advantage of available equipment and/or suppliers to be prepared to produce as soon as
3 for some assets crude price is back above break-even level
◼ Develop fast recovery programs to immediate commence operations – monitor and establish
trigger points

◼ Be commercially proactive and flexible when looking for new production outlets
Oversupply
4
Crude traveling far

Source: Arthur D. Little 15

 COVID-19 Impact & Mitigation per Segment – Oil field services

Focus on medium term impacts for Oil Field Services and mitigation
actions to be considered
Oil Field Services
Mitigation actions / opportunities
potential impact

◼ Consider flexibility in contract guarantee of work (such as contract expiry extension) if price
Contract renegotiations /
1 cancellations
negotiations are being sought by Operators
◼ Consider accelerate price normalization once the situation returns to stabilization

◼ Conduct full asset rationalization and prioritization across all operated regions
2 Un-utilised assets ◼ Establish asset-readiness programs to ensure immediate deployment once market stabilizes
◼ Collaborate with other OFS players to sub-contract work to maintain high utilization of assets
and manpower

◼ Monitor potential M&A opportunities

Consolidation / M&A
3 activities
◼ Develop recovery plans to include grow and diversify using inorganic strategies

◼ Conducting an asset rationalization assessment will provide full transparency on sparing

Delayed spare parts to
4 maintain operations
philosophy
◼ Establish local pool with other OFS players

Source: Arthur D. Little 16

 COVID-19 Impact & Mitigation per Segment - Refining

Refineries needs to do frequent re programing, isolation of shifts, operate

at minimum staff levels and cancel non critical CAPEX initiatives
Refining Segment
Mitigation actions
potential threats

◼ Contracted feedstock/crude re sale or contract re negotiation

1 Storage restrictions ◼ High frequency of operations optimization and re scheduling

◼ Minimize number of staff entering refineries and depots

CAPEX initiatives and
2 turnaround stopped
◼ Delay non critical CAPEX initiatives
◼ Stop or delay and reschedule turnarounds

◼ Close monitor of marginal economics of process unit to avoid hidden suboptimal production
Low utilization rates drive
3 low to negative margins
◼ Run at minimum operational rate as son as does not compensate to shutdown plant
◼ Assess buy-import vs. maintain refinery running
◼ Continue with operational efficiency initiatives as soon as quarantine period ends

◼ Close monitor marginal economics and evaluating shutdowns of light products units
Demand decrease and mix
4 change
◼ Assess buy-import vs. high processing rates
◼ Look after markets for intermediate products (i.e. naphtha) to maintain refinery running

Source: Arthur D. Little 17

 COVID-19 Impact & Mitigation per Segment – Transport & Distribution

Transport and distribution segment faces logistics disruptions and financial

restrictions that will need support from refiners/integrated companies
Transport & Distribution
Mitigation actions / opportunities
potential impact

◼ More frequent and strict pipeline capacity planning, shipping only crude with a secure outlet
1 Lack of storage downstream ◼ Benefit by open access to own available storage
◼ Swap storage among geographies with trading and midstream companies
◼ Assess use of floating storage

◼ Work with isolated shifts and minimum staff levels

2 Limited to minimum staff ◼ Avoid delayable contractors intervention to facilities
◼ Cancel non critical CAPEX initiatives

◼ Offer flexible payment conditions to retail stations dealers

Lower revenues because of
3 volume drop
◼ Consider flexibilization take or pay contracts considering force majeure conditions
◼ Extend timing for product delivery of a contract (i.e. delivering total amount when market
conditions improve)

◼ Re negotiate contracted freight/trucks

4 Demand decrease ◼ Re assess key client portfolio for future expected market conditions
◼ Re assess channel strategy for B2B customers

Source: Arthur D. Little 18

Arthur D. Little’s global Energy & Utilities Team

Austria Belgium China Czech Republic France

Bela Virag Kurt Baes Yusuke Harada Lukas Vylupek Vincent Bamberger
[email protected] [email protected] [email protected] [email protected] [email protected]

Germany India Italy Japan Korea

Michael Kruse Thomas Kuruvilla Saverio Caldani Yuma Ito Chulseung Son
[email protected] [email protected] [email protected] [email protected] [email protected]

Latin America Lebanon Middle East The Netherlands Norway

Daniel Monzon Albert Kostanian Adnan Merhaba Martijn Eikelenboom Lars Thurmann-Moe
[email protected] [email protected] [email protected] [email protected] [email protected]

Poland Russian Federation Singapore Spain Sweden

Piotr Baranowski Pavel Luzbuh Yusuke Harada Juan Gonzalez Lars Thurmann-Moe
[email protected] [email protected] [email protected] [email protected] [email protected]

Switzerland Turkey UK USA

Michael Kruse Coskun Baban Stephen Rogers Rodolfo Guzman
[email protected] [email protected] [email protected] [email protected]

19
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