An analyst has suggested the same “hardball” treatment that the supply chain was subjected to during the last downturn may not be repeated this time around.
Mhairidh Evans, principal analyst at Wood Mackenzie, said the energy researcher and consultancy firm had “picked up more concern” from all camps about the health of the oilfield service sector.
However, Ms Evans did warn the global supply chain was set for a “demand shock” with “no quick rebound in sight”, and that drilling rig day rates would hit a “new bottom”.
During a webinar on the offshore upstream market, Ms Evans said operators had reacted quickly to the oil price slump, taking out capex and deferring spending as much as possible.
Projects will be governed by the three “Ds” – defer, deflate and downsize, which means taking projects, making them smaller and splitting them into phases, she said.
Only 10 “major” new projects – those targeting more than 50 million barrels — are expected to be sanctioned worldwide in 2020, compared to about 40 last year.
FPSO orders were strong in 2019, with about 16 being made, representing a return to 2013 levels and a “vote of confidence” in the industry.
That trend was expected to continue this year, but the outlook has “changed dramatically” as operators pull back from investment, Ms Evans said.
The analyst noted that deferring projects and production might not be “such a bad thing” for operators’ balance sheets.
She said: “Because of Covid-19 shutting mills, yards and ports needed to ship goods, a certain percentage of work in progress is subject to delays.
“For operators, delays in receiving orders might mean a deferral of capex, which might not be such a bad thing. It might be a silver lining from an E&P perspective as they’re looking to do that anyway.
“The same goes for deferring production. Deferring production in a low oil price market may not be such a bad thing, depending on operator portfolios and hedging positions.”
But it’s harder to see a “silver lining” from a supplier perspective, Ms Evans said.
Operators deferring investment will trigger a “broad reset” of the global project base, forcing the OFS sector to shrink, she warned.
Meanwhile, Covid-related restrictions have added a new layer of logistical complexity for the huge “web” of companies involved in providing equipment and components.
And if suppliers can’t deliver as planned, they’re unlikely to be invoicing and receiving revenue.
Ms Evans said: “There is concern about the supply chain’s financial health. How long the deflation cycle lasts depends what happens with demand, but also how quickly the supply chain adjusts its capacity
“In the last downturn operators talked about not wanting to push too hard on the supply chain, saying ‘it’s not right to do that, it’s not good for the supply chain’s health’. Sceptics would say actions and words did not always match up there.
“It’s true this time that we’re picking up more concern from all camps including investors for the health of the supply chain.
“The fundamentals this time are different. We expect less of that hardball behaviour when negotiating on pricing and more reasonable terms and working together as opposed to that pure push on pricing pressure.”
On rig day rates, she said drilling contractors were fetching $400,000 per day, but that dropped to $150,000 per day in 2017.
Ms Evans added: “What we’re looking at now is another cycle, with a new bottom in day rates. Utilisation will be as low as 60% despite rigs coming out of the market.”
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