It has now been nearly 3 months since the one-two punches of an unprecedented modern-day pandemic and a free fall in oil prices due to the oversupply of oil resulting from a tremendous, sudden drop in demand. The domino effects across the globe continue to evolve in economies, industries, and personal lives.
West Texas Intermediate hovers around $20/bbl (as of mid-April) after starting the year in the $60s: a drop in oil price of two-thirds while global oil demand continues to sputter. The International Energy Agency (IEA) forecast the demand to be down in April by 29 million B/D, a nearly 30% decrease from the world’s daily consumption a year ago of 100 million B/D. It added that demand has not been this low since 1995. The US Energy Information Administration expects global petroleum and liquid fuels demand to decrease by 5.2 million B/D in 2020. As the saying goes, “You do the math.”
The math was done by the world’s operators, oilfield services companies, and related industry players—and the answers in far too many cases resulted in necessary, hard decisions. Furloughs and layoffs were announced early on, and capital expenditures were slashed as much as 30 to 50%. In many cases, companies soon thereafter announced further cuts in personnel and budgets.
The oil world has seen many shocks over the years, but none has hit the industry with quite the ferocity we are witnessing today.
An example of a weighty cut was Abu Dhabi National Oil Company’s (ADNOC) termination of two contracts worth $1.65 billion granted to Petrofac for work to be done for the Dalma gas development project located off the northwest coast of the Emirate of Abu Dhabi. The contracts were awarded in February; in March, ADNOC notified contractors and suppliers it would review existing deals to find ways to reduce costs due to the steep slide in oil prices. On 16 April, the deal was called off.
Petrofac said it is committed to working with ADNOC over the coming weeks to explore “alternative options” for the work.
The oil and gas industry has demonstrated resiliency many times over in its long history, and as it kicks off the first-quarter earnings season, its guidance calls will reveal the plans and actions needed to move forward in the near term.
The uncertainty wrought by the repercussions of the pandemic and supply/demand imbalance has introduced a host of unknown factors beyond anyone’s direct control. But companies can directly control their operations and business practices and will be presenting their full-year 2020 outlook in coordination with the first-quarter results.
Diligence and resilience, based on experience and hard lessons learned, go hand in hand and will guide each company’s best attempts to manage the unique unpredictability it faces today.
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