During the past 15 months, the world has needed to face the unexpected challenge of COVID-19. There is no industry that has been left untouched and many are continuing to adapt to the disruption it has caused.

This period has been particularly tough on the Upstream Oil and Gas Industry. Lockdowns all over the world caused activity to be halted and many staff to be put on furlough, but what happened to demand was even more damaging. With a dramatic fall in travel, manufacturing and large parts of the secondary sector in general, demand for oil and gas fell sharply during 2020. This, in turn, drove down the price of oil dramatically, which is only now seeing a sustained rebound.

Having initially shown promising signs of recovery from its last downturn, the Oil and Gas Industry in 2020 had to fight on three fronts, contending with the chaos of COVID-19, the continuing drop in the price of oil and the acceleration of Green Energy programmes. This combination of obstacles resulted in the Oil and Gas Market contracting, which most notably included a reduction in new investments. As anyone working in the Upstream sector can tell you, reduced investment equals reduced exploration activities.

So what does this mean for the Oil and Gas supply chain as a whole? First, let us establish that exploration activities lie at the base of the supply chain (as shown in the picture below). These activities are regulated by licensing permits - agreements between a country’s Government and one or more Exploration and Production companies.

Oil and Gas Supply Chain

When we then analyse the licensing activities throughout the past year, we can see that governments have delayed announcements, extended deadlines and even cancelled rounds. Therefore we can comfortably assume that should this market contraction, and further licensing delays, continue in the coming years, the impact on the base of the supply chain will be so substantial that it will unquestionably affect the supply chain as a whole. The slowdown of exploration activities will result in a reduction of new oil and gas fields discovered, which will consequently cause a reduction in oil and gas production, transport, refinement and sales.

Clearly, the outcomes to this situation are incredibly serious for the entire Oil and Gas Industry and need to be addressed in a timely and well-thought-out manner. Below we have taken a close look at licensing rounds in 2020 and have made certain predictions for possible future scenarios.

Reviewing exploration licensing in 2020

If you are unfamiliar with the process, exploration licences are granted by direct negotiation with a Government or by a public auction called a Licensing Round. The Government takes great interest in granting these licences due to the economic incentives they bring. Increased cash flow, new jobs, reducing oil-import dependency, activating all other satellite activities which are related to the exploitation of natural resources - there is a substantial amount to be gained from these projects. Without an alternative plan for green energy, Governments will miss all of these opportunities through the cancelling or delaying of licensing rounds, especially for developing countries.

Looking at the MapStand “Licensing Round Status” layer (as shown in the map below), we can see Brazil has suspended its Brazil 7th Pre-Salt Bid Round (Brazil Energy, 2020). It is a similar story for the South Sudan Licensing Round for which the announcement has been delayed due to Covid19 (Africa Oil and Power, 2020). The Malaysia 2020 Licensing Round application deadline was extended to 29th January 2021 with awards expected soon (Petronas, 2020). The Lebanon Licensing Round and the Senegal Bid Round both had deadlines extended into 2021 due to the pandemic (Lebanese Petroleum Administration, 2020: Petrosen 2020). Egypt didn’t launch the expected 2020 EGPC, EGAS, Red Sea licensing rounds moving toward the 2021 ones (Ministry of Petroleum & Mineral Resources, 2021).

Outcomes from rounds that were open before or during the pandemic had varying levels of success. Licensing rounds in mature basins had good attendance i.e the Norway APA 2020 where 30 companies have received offers of ownership interests in a total of 61 production licences (NPD, 2021). Also, the Indian OALP round IV and V received bids for all the blocks on offer, albeit with each of these bids coming from the same bidder - the national oil company.

Conversely in other cases results were quite poor. One example would be Sierra Leone where only 6 bids for nearly 30 blocks on offer were accepted. Canada, Newfoundland and Labrador had just one of 17 blocks awarded (C-NLOPB, 2020). Similarly, the Australian 19th Licensing round received bids only for one third of the offered acreages and the USA BOEM Gulf of Mexico also saw two rounds close with very low attendance (BOEM, 2021).

Other Governments applying direct negotiations have seen very low interests, such as Uruguay, where just one block has been awarded so far.

Denmark has decided to go in a completely different direction and create a new plan. At the end of December 2020 the Danish parliament decided to cancel the ongoing 8th licensing round and all the future rounds as they define the 2050 cutoff date to stop all Oil and Gas extraction in the North Sea (Danish Energy Agency, 2020). Similarly, the Irish Government (Ireland Government, 2021) banned further Oil and Gas exploration licenses in February 2021 and UK OGA temporarily paused its 2021 round (OGA, 2020).

Rounds Closed in 2020

Rounds Extended in 2021

Looking ahead

Licensing Round 2021

One key aspect of licensing to highlight is the timing of announcing the round. If a Government wants to offer acreage in frontier basins, for example, quite considerable capital will be required in order to prepare a licensing round. This includes investing in new seismic acquisition or finding a partner that will. As such, the round must be announced at the right moment to optimize the potential results, or, move to a direct negotiation if outcomes are uncertain.

It is quite probable that the number of acreages that will be on offer in the next few years will be lower than recent levels, and/or that the licensing rounds in areas requesting higher investments, like frontier basins, will be delayed or switched to direct negotiations. If we have a look at the countries that have delayed their licensing round, we can spot frontier areas with low previous exploration activities such as Sudan, or areas of deep-water exploration like Senegal or Brazil. In these cases, the potential exploration activities in these areas are attractive, but expensive, and it is easy to understand that Governments have delayed deadlines in the hopes of a market recovery.

After looking closely at this turbulent past year, what can we expect for the remainder of 2021?

Some of the most exciting to keep an eye out for will be Egypt 2021, Malaysia 2021 and Brazil 17th Round. It will be interesting to monitor how these rounds evolve whilst nations continue to battle the coronavirus at varying speeds and new investment pours into the renewable sector. It will be also interesting to observe the UK activities as, despite the temporarily paused round, the UK Government has since confirmed that future exploration will still take place as part of a phased energy transition (BBC, 2021).

The transition to renewable energy is going to take considerable time. Businesses and indeed countries, are not going to be able to abandon their reliance on oil and gas within the next few years. Oil price is climbing back at pre pandemic level and the continued exploration activities will help support the world’s demand for energy as a long-term plan for renewable energy implementation is established.

Rounds Opened in 2021

Rounds Planned in 2021