Oil and gas investors will likely be reluctant to commit an exploration budget to licensing rounds in the near term due to the economically challenging conditions and uncertainty created by Covid-19.

Licensing rounds are likely to be extended, delayed or temporarily suspended as governments prioritise managing the domestic impact of the virus or wait for investment conditions to improve. Bangladesh, Liberia and South Sudan have already announced changes to their proposed licensing rounds and it is likely that others will follow.

Licensing rounds that proceed in the short term risk receiving fewer or no bids. Although not directly analogous to the 2014 oil price crash, a muted investor response was seen for most licensing rounds launched during the lull due to low investor confidence. For example, Gabon’s 11th Licensing Round received no bids for its five deepwater blocks offered in 2015.

Open and potentially upcoming licensing round opportunities that may be affected by the Covid-19 pandemic in 2020

Looking further ahead, licensing round activity will be subject to significant uncertainty, stemming both from the unknown length of the Covid-19 demand shock and the duration of the increased supply.

Following the stabilisation of the oil price, there is likely to be a period of lag, while investor confidence restores, before the number of new awards secured through licensing rounds increase. Companies that have reduced exploration expenditure during this period of uncertainty risk significantly lowering their reserve replacement ratio, which means that they are likely to need to identify new exploration opportunities in the longer term. This may result in an increase in awards secured through direct negotiations.

Companies with less exposure to the oil price through limited or hedged production, which also have available capital in the current environment, are likely to be well-positioned for rounds held following the oil price stabilisation and may be in an advantageous position to capitalise on reduced service costs for exploration activities.