The upstream supply chain “faces the very real threat of collapse”, a new report from Wood Mackenzie has warned, setting the industry on the path of another crisis as demand recovers.
Suppliers and equipment providers are still in the process of recovering the last downturn, from 2014-16. Operators have taken steps amid the current crisis to cut hard and fast, securing their own survival but putting new pressures on the supply chain.
The extent of this pressure on the supply chain does pose new risks to operators, the Woodmac report said. It poses a “critical downside challenge for upstream operators in the immediate future”. The current crisis could, therefore, lead to another crisis with the supply chain unable to respond to future demand.
The first casualty of the present squeeze has been deferral of final investment decisions (FIDs). Only around 10-15 are now expected around the world, according to Woodmac. These will be pushed back to 2021 – at best.
Projects looking best positioned for this year are the core of growth for majors, such as ExxonMobil’s Guyana play, and low-cost projects in the Middle East backed by national oil companies (NOCs).
Price cuts achieved by operators, in the region of 10-30% over 2014-19, these have not increased since. Further cuts at service companies will lead to reductions of investments in “technology, equipment and associated services and likely significant restructuring and insolvency in the sector”, the report said.
There will be less future capacity to respond to new demand increases when the market recovers. Operators must come to an understanding of supply chain management in order to recover quickly.
Identifying where items are purchased and from whom will be a first step. Disruptions in Asia, whether coronavirus or the Japanese tsunami, have demonstrated the knock-on impact of production.
This process of identification will go on to provide insights into what risks might occur and how to navigate them. Resilience planning will go some way to letting companies cope with “black swan” events.
The industry that emerges from the coronavirus and oil price crash are “likely to look very different”, Woodmac said. “Demand will return as the pandemic subsides, excess supply will come under control and oil prices will move to more sustainable levels,” the report said.
A surge for services and equipment could trigger another “wave of disruptions and supply challenges … particularly if there are to be significant reductions in supply chain capacity. Operators should start developing contingencies to manage the post-crisis period and ensure that they will have access to a robust supply chain.”