COVID-19 outbreak and lockdowns have led to shutdown of several large-scale and small-scale industries across the globe. However, sectors such as healthcare, food & beverage have witnessed staggering growth. The oil and gas industry were already facing trouble with the demand and supply imbalance before the novel Coronavirus emergency. The COVID-19 pandemic has hit each industry hard, however, the one industry which has endured the greatest shot is the oil and gas industry.

Jaw-dropping Price Crash to Minus $37.6 per Barrel (WTI)

The oil and gas industry were already facing trouble with the demand and supply imbalance before the Novel Coronavirus emergency. For the oil and gas industry as a whole, supply and demand play a major role is determining the price of benchmarked crude i.e., Brent crude, WTI, etc. High supply compared to low market demand (30% down); played a key role in the recent oil price crash, which, combined with the volatile markets, has pushed many field developments projects out in time.

  • Crude oil Price tumbled to new low’s
  • Global oil demand plunged down by 30%
  • Oil storage services spiked to all time high

The average price of Brent crude oil stood at $44.59 per barrel in August, 2020 when compared to $64.28 per barrel in 2019. Declining prices of crude oil has driven the demand for oil storage facilities across the globe. Post-COVID-19 pandemic, in the month of April, 2020, the price of crude oil went below $0. The sellers were beginning to pay buyers to take immediate deliveries in a bid to avoid uncertainty in business and the cost incurred on storage of crude oil, as most of the storage facilities were running out of space, globally. Between April-May 2020, the total volume of stored crude oil was 3.2 billion barrels.

The spread of this virus has constrained many oil and gas companies globally to either stop or hinder their physical activities, which has affected production in both upstream and downstream operations. During the pandemic many projects went on a halt owing to the complete lockdowns in many nations across the globe.

Fear of Uncertainty to Bankruptcy- A new normal in age of coronavirus for oil & gas companies

Post COVID-19 pandemic, countless companies in oil & gas business, are now treading the waters of near-insolvency. Companies such as Oil Search, Arena Energy, Chesapeake Energy, etc have already filed for bankruptcy.

  • More than 1,000 OFS to file bankruptcy
  • Big 4 to take this with a pinch of salt
  • Small and mid-sized players to exit

Post COVID-19 outbreak, more than US$5 Bn were wiped off from the oilfield services (OFS) market.  OFS-based companies operating in North America and Europe were badly impacted due to permanent closure/temporary shutdown of major upstream oil & gas projects.

Around 22% of the Norwegian and U.K. mid and small-sized oilfield service (OFS) companies, are set to become insolvent as the effect of the COVID-19 epidemic will hit the continent’s OFS market hard and cut purchases by about $5 billion year-on-year. OFS providers offering services related to drill rigs, well testing and intervention, and maintenance, modifications and operations (MMO) are the hardest-hit segments due COVID-19 pandemic.

Due to the ongoing pandemic followed by business uncertainty, more than 1,000 oilfield service providers are on the edge of bankruptcy. Whiting Petroleum became the first domino to fall. Oil search, Diamond Offshore, Arena Energy, BJ Services LLC, Noble Corp., and Chesapeake Energy, have already filed bankruptcy. Based on bankruptcy component assessment, which includes current assets, liabilities, shareholder equity, investments, etc., companies such as:

  • 40% probability of filing for bankruptcy– Halliburton, Occidental Petroleum, and Marathon Oil
  • 40%-50% probability of filing for bankruptcy– The Big 4 Oil Giants (Chevron, ExxonMobil, Royal Dutch Shell and BP)

The impact is so big that even the billion dollar “supermajors” in the oil & gas business, are thriving to survive and slowly heading towards insolvency/liquidity.

  • On 25th August 2020, Oil and gas exploration and development company Oil Search reported an 85% drop in H1-2020, compared to last year during the same period (H1-2019).
  • Arena Energy, Gulf of Mexico driller, has filed for Chapter 11 protection, becoming the latest company in the U.S. energy industry to file for bankruptcy following the COVID-19 outbreak. The oil and gas driller has filed for bankruptcy with an intention to virtually sell all of its assets to Lime Rock Partners in a deal valued at $64.2m in cash.
  • On June 28, 2020, Chesapeake Energy Corp., a U.S.-based shale exploration company, filed for bankruptcy after defaulting on interest payments earlier in the month.
  • On July, 2020, Noble Corp., the offshore drilling contractor, filed for bankruptcy with a plan to cut more than $3.4 billion of debt after a crash in crude prices made undersea oil wells too expensive.

What Follows Next- Best and Worst Scenarios

The oil & gas industry has seen fluctuation due to COVID-19 impact and international lockdown in several region. During the pandemic many projects went on a halt owing to the complete lockdowns in many nations across the globe. The easing off the lockdown has brought about a surge in the backlog projects and is likely to bolster the demand with planned projects reviving over the due course.

Best-case scenario

  • V-shaped recovery due to demand surge and backlog demand completion scenario

                                                           Or

  • U-shaped recovery, it may take many months/years, for the economy to recover.

Post unlock activity, the oil & gas downstream sector has witnessed a clear spike in demand for crude oil-based products, especially gasoline, CNG, and diesel in the automotive and industrial sectors. This has ramped up production and the demand are likely to rebound through a V-shaped recovery pattern.

Ongoing lockdown and unlock activities are expected to last some months till a proper vaccine is developed. Thus, U-shaped recovery pattern is expected, wherein, the demand will remain flat for some month or maybe a year until it rebounds. The Great Recession (2007-2009) is a good example of a U-shared recession.

Worst-case scenarios

  • W-shaped recovery due to demand surge and backlog demand completion scenario

                                                           Or

  • L-shaped recovery, it takes many months, if not years, for the economy to recover.

The ongoing pandemic has shattered the oil & gas business upside down. A double-dip recession or a flat L-shaped growth is possible due to lifting lockdowns without a suitable drug to combat coronavirus. A lot of nations such as Japan, China, and other Asia nations, has witnessed a second wave of COVID-19 cases. Thus, periodic lockdown and unlock activities halted operations in oil & gas industry. The ongoing scenario is expected to result in a double-dip recession/W-shaped recovery or L-shaped recovery. In this outcome, growth falls and does not recover for years, creating the long shape of the L. The L-shaped recovery is only possible if the Government is unable to control coronavirus cases. The classic case of L-shaped recovery is Japan’s economy post in 1991 to 2003.

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