Strategizing How Oil and Gas Markets Can Overcome the Downturn

Crude oil prices have observed their biggest fall in the past three decades. Some of the reasons behind this collapse are the Russia–Saudi supply competition, the COVID-19 pandemic and the global slump in demand. This fall is supposed to be the worst possible time for the upstream market and bounce back from this situation is unlikely in the short term.

According to a few reports, Q1 2020 observed a slump of almost 3 million barrels per day in global oil demand due to the COVID-19 pandemic. Sharp demand drops in Asia, particularly in China and India, are less likely to come back on track at least until mid-July. Also, significant operational disruption in upcoming months is expected to impact facilities such as refineries, ports, and LNG terminals due to their high labor-intensive nature. The COVID-19 pandemic has its visible implications on the demand of services, including engineering, procurement and construction. Oil and gas operators are expected to reduce project sanctioning by up to $131 billion, along with significant layoffs and furloughs.

Companies Commence Cost Cutting

Owing to factors such as low oil prices, geopolitical tussles and COVID-19, company leaders announced plans to make significant cost cuts and savings. In response to the current market scenario, major oil and gas companies are taking various steps to safeguard their commercial interests. Some companies like Chevron and Shell are ensuring their good positioning for economic recovery, reducing their CAPEX spending plans significantly and suspending share repurchase. Chevron is targeting a cost savings of $2 billion. Royal Dutch Shell has announced the reduction of its operating cost by $3 to $4 billion per annum over the next year. French multinational, Total S.A., has opted for a strategy to cut organic CAPEX by more than $3 billion, making savings of $800 million on operating costs in 2020. British multinational oil and gas giant, BP, will reduce CAPEX and OPEX spending in response to the pandemic.

The market hardly sees a winner in the present scenario. Major oil extracting companies are losing money irrespective of their market share. Countries such as Iraq, Iran, Libya and Venezuela, all of whom are suffering conflicts, uprisings or sanctions will be paying the heaviest price. Some countries like Iraq, Nigeria and Saudi Arabia have decided to sell oil at a lower rate and are limiting their exploration, production and new project budgets. The USA is also likely to face the consequences as the shale gas boom, OPEC–Russia price war and reduction in fuel consumption due to the lockdown will hurt the oil and gas companies.

Managing the Crisis and Maintaining Profitability

The industry giants should take a practical approach for crisis management to maintain financial profitability following the current market slump. Companies should reassess profitability and cash flow generation in turn to support ongoing operations — including current operating expenses, taxes and other cash expense items. For example, ExxonMobil, BP, Shell and ConocoPhillips have announced significant capital and operating expense reductions. Companies should review capital and corporate budgets to identify investments, and if the corporation is under debt risk, the company should diversify and divest non-core or underperforming assets. For example, ConocoPhillips has announced a plan of reducing capital spending by 10% in 2020.

To deal with risks related to employees, companies should evaluate the scope of automation to minimize personnel contact, consider building flexible work arrangements and outsource functions to reduce operating costs. For example, major oil and gas companies like Schlumberger, Halliburton and Baker Hughes are shifting to a work-from-home model to cope with COVID-19 lockdowns.

To ensure supply chain management, companies should plan a supply chain shift, which includes alternative supplier identification, and analyze and discuss impacts of COVID-19 with suppliers and customers ahead of reviewing the balance sheet and liquidity for baseline calibration. The current market scenario and impacts of COVID-19 may hamper the conditions of long-lived assets and goodwill, liquidity and capital spending. Looking for the scope of mergers and acquisitions may act as relief for companies. Finally, the current disruption has made it evident why enterprises should plan financial strategies according to geographies and asses the vulnerability of different countries.

A Strong Strategy Serves Survival

The oil and gas sector faces impact from various fast-changing variables like geopolitics, demand-supply and pandemics like COVID-19. Companies should plan for a future market that has stable hydrocarbon prices. It becomes imperative for oil and gas companies to analyze business and resource requirements and preserve them. Successful energy giants have survived down-cycles before and emerged stronger after the downturn. A sound company strategy and right decision-making leaders will help the industry recover from this hampered market with flying colors.

References

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