Though the long-term impact of Coronavirus on the oil and gas sector is still unclear, there are indications that the industry could run into bankruptcy as well as headcount cut.
A global research body, Wood Mackenzie’s noted yesterday, that oil price crash remains bleak news for oilfield service (OFS) companies, stressing that the industry’s supply chain feels would equally not be spared.
The group noted that while the service sector struggled into the year with low margins, oversupply and weak investor sentiment, optimism regarding an uptick in 2020 has been unequivocally crushed.
Principal Analyst in Wood Mackenzie’s upstream supply chain research team, Mhairidh Evans, said: “Even more capital discipline from operators will reduce demand significantly in 2020. Whether offshore or in the Lower 48, only a handful of major projects are expected to move forward this year.”
To her, companies had already cut so much, adding that it’s hard to identify further savings without drastic measures, including refinancing and the restructuring of business models.
Evans said: “Headcount cuts and bankruptcies are inevitable.”
She stated that pre-FID greenfield projects stand out as the first to fall, which will have a serious impact on the supply chain.
“We had forecast growth in floating production systems (FPS) market for 2020 with up to 18 new contract awards. Now we expect only a handful to go ahead, which would take the FPS market to 2015/16 levels.
“Our preliminary analysis suggests global upstream capital investment will fall by at least 25 percent in 2020.
“Most of that impact will be through activity reduction, although OFS pricing deflation will play a role,” Evans stated
She disclosed some pressure pumpers have reduced prices by as much as 20 percent, while rig rates have dropped by about 15 percent in the US.
Evans predicted very low levels of new offshore contracting, noting that there have been fewer immediate reactions by offshore service providers.
She said: “Requests for concessions on existing contracts seem inevitable. And any operator bold enough to enter into new rig contracts can expect rock bottom rates as the rig market heads towards low utilization levels over the next year.
“Excess capacity is also an issue. Companies holding onto idle assets ‘just in case’, will quickly think again. The prospect of sub-$40/bbl oil will force a profound change in the sector’s footprint.
“While there’s short-term pain associated with this, it could ultimately create a more sustainable business for those that survive the downturn.”