A crude fall of fortunes

THE oil industry is in the midst of a crisis, taking hits all around. The number of rigs is going down, projects are getting stalled and people are being laid off amid a raging pandemic.

Saudi Arabia, a long term player, had been striving in the past to keep spare capacity — and at a cost to itself — so as to maintain stability in the markets and be able to respond to any urgent demand. To maintain its leadership role in the sector, Riyadh felt keeping spare capacity a necessity. Now it seems to be rethinking the strategy. Harsh economic conditions have compelled Saudi Arabia to be cautious in its approach.

As per Bloomberg, Saudi Aramco, the world’s largest oil exporter, has idled two offshore drilling rigs and has suspended development work on some of its crude and natural gas deposits. Early May, offshore drilling contractor Noble Corporation plc said that its jack-up rig Noble Scott Marks, located offshore Saudi Arabia, will be suspended at the request of its client for up to one year. Later, Shelf Drilling reported, it had received a notification from Aramco to suspend operations of the High Island IV jack-up rig for up to 12 months.

Aramco has also announced slashing capital expenditure for this year to between $25 billion and $30bn from the initial target of $40bn, while putting 2021 spending under review. As a consequence, expansion projects worth US$18bn have been postponed in recent weeks. A project to expand oil and gas output at the Marjan and Berri fields has been deferred for a period of six months to a year. As per the International Energy Agency, the planned expansion would have increased oil-production capacity at the fields by 550,000 barrels per day (bpd) to a combined 1.35 million bpd. The project was also projected to give a boost to gas flows by 2.5bn standard cubic feet a day, sending gas by pipeline from Marjan to an onshore processing plant at Berri for domestic use.

And Aramco is not alone in its push to slash expenditure. Other producers are also reacting to the emerging scenario.

More than 100,000 oil and gas jobs have already been lost in the United States, a Rystad Energy analysis revealed. The US oil and gas rig count, an early indicator of future output, fell to a record low for a seventh week in a row, dropping by 13 to 266 in the week to June 19, Baker Hughes reported. That was 701 rigs, or 72 per cent, below this time last year.

The US oil rigs fell 10 to 189 in recent weeks, the lowest since June 2009, while gas rigs dropped by three to 75, their lowest on record according to data going back to 1987.

Since pandemic made its way to the US in early February, oil and gas as well as construction jobs have decreased by more than 10pc. In Louisiana alone, more than 40pc of liquefied natural gas (LNG) investments scheduled for this year have been postponed or canceled, the report highlighted.

Earlier this month, oil major BP announced cutting 10,000 jobs or around 15pc of its total workforce.

Canada has also curtailed its output by 1m bpd. Oil and gas rig count in the country fell four to an all-time low of 17 earlier this month, Baker Hughes reported. That was 102 rigs, or 86pc below, this time last year.

The number of people working in Canada’s energy sector has also fallen by more than 14,000 so far this spring. Oil and gas producer Ovintiv — formerly Encana — has slashed its workforce by 25pc, affecting roughly 650 jobs. Canadian pipeline giant Enbridge has also announced that 800 people working for the company would be taking voluntary buyouts, including early retirement.

From a long term view, the scenario is not encouraging. Such events carry long term ramifications. With longer gestation periods, new oil and gas projects may not get online when required. Any geopolitical flare-up could see the markets spiking. Yet, in the current circumstances, no solution seems in sight. The industry is headed to a downturn in real sense.