COVID-19 and Falling Prices Reflect Supply Chain Risks in Oil and Gas

To contain the spread of COVID-19, governments across the world had to impose lockdowns, restrict international transportation and immediately pause industrial activities. This translated to a significantly lower demand for crude oil across the globe, which resulted in oversupply and a subsequent plunge in crude oil prices.

Major oil and gas operators such as Royal Dutch Shell, Total, Chevron and Eni have announced steep cuts of around 20% in capital spending for 2020. Several US exploration and production companies have announced steeper reductions. For example, Occidental Petroleum announced a 47% reduction in capital spending for 2020. This is expected to further negatively impact the debt of oil and gas operating companies. Producing fields with a higher break-even price is no longer creating value for the operators.

Challenges in the Supply Chain

Uncertainty around the COVID-19 crisis, demand disruption and low crude oil prices have paused the recovery of the upstream supply chain, making it vulnerable to the risks such as disruption in the supply of manufactured equipment and the transportation of service personnel across borders. This could herald worse financial problems for oilfield service companies compared to 2014/15. There is also less fat in the margin to trim. Further insolvency, restructuring and consolidation in the supply chain may lead to a reduction in investment of equipment, associated services and technologies.

Africa is highly dependent on oilfield equipment and immigrant oil managers from North America and Europe for the development of their oil and gas industry. Restriction in the movement of personnel and marine shipping has created a tough time for procurement managers in the African countries. Suppliers and sub-suppliers of several oil and gas operators across the globe are based in affected regions such as China, Italy, Spain, and South Korea. Even companies that do not procure directly from China have tier 2 and 3 suppliers that do. Single sourcing or souring from one region has led to disruption in the upstream oil and gas supply chain.

Diamond Offshore, an offshore drilling company, filed for bankruptcy in the last week of April 2020. Day-rates and the demand for offshore rigs had declined steeply this year amid the crude oil price war and steep drop in demand for oil due to COVID-19. Further, the company posted losses in four of the last five years. In the last thirty days between the last week of March and April 2020, five publicly traded oil companies filed for bankruptcy. More bankruptcy is expected in the coming months. This series of bankruptcies indicates a lack of financial stability in the supply chain and is a matter of concern for procurement managers.

Understanding the Supply Chain Network Is the Need of the Hour

Today, many companies are not aware of the vulnerability of their supply chain network to global shocks. The industry needs to understand the suppliers’ matrix — namely their sub-contractors, local and global sites — and map overdependence on sourcing from one location. In the current challenging time, the oil and gas industry need to have adequate risk intelligence and take a proactive approach to developing supply chain resilience. This would include mapping interdependencies by collecting information from critical suppliers on their extended supply chain and identifying supply chain interdependencies. By mapping potential risk areas and conducting research on markets and countries that have a significant impact on the extended supply chain of each procurement category, enterprises can identify key risk indicators. Monitoring these risk indicators can alert companies ahead of time. Further, investment in supply chain planning and control tower, can help to better visualize the movement of products and services in the supply chain. This would help to respond and even predict supply chain issues. These would help in minimizing the impact of global shocks on the supply chain.

References

• https://www.offshore-technology.com/features/rock-bottom-how-covid-19-has-shattered-the-oil-industry/
• https://edition.cnn.com/2020/04/27/investing/diamond-offshore-oil-company-files-bankruptcy/index.html
• https://pubs.spe.org/en/jpt/jpt-article-detail/?art=6859
• https://www2.deloitte.com/global/en/pages/risk/articles/covid-19-managing-supply-chain-risk-and-disruption.html#
• https://www.oilandgasvisionjobs.com/news-item/coronavirus-risks-hit-the-oil-and-gas-supply-chain