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Recent developments involving OPEC and COVID-19 have caused
historic downturns in global oil prices and national economies.
This situation has led the major players in the oil and gas
industry to cut their spending budgets drastically for the coming
few years, in turn delaying or cancelling many upcoming projects
for both new developments and workover and maintenance.
While it would be reasonable to assume that costs in the markets
that depend on this upstream spending will decrease, our research
reveals they will all react differently, in timing, severity and
perhaps even directionality, depending on several factors.
We performed this research under three scenarios and the base
case assumes, among other conditions, that new, global COVID-19
cases will peak by mid-second quarter 2020 and that Brent crude
prices will generally be in the $10-$30/bbl range for the rest of
2020, rising to $30-$40/bbl in 2021 as demand growth returns.
Even though the presence of a base case inherently implies we
have modeled a lower scenario, our foundational assumptions are
still bearish but even at these depressed levels we only expect a
6% drop over the next two years from the overall UOCI's latest
level of 173. If this seems muted compared to the historical drop
we've recently seen in oil price, we must remember that service
companies are still in recovery from the last downturn of 2014-2015
(figure 1).
Figure 1: UOCS portfolio indexes since 2014
A common theme across the service industry since 2015 has been
re-organization, with all companies trying to minimize their costs
as much as they could. Not all organizations survived and the ones
that did are now so lean and running on such thin margins that
there is very little fat to trim.
Owing to the still-distressed state of much of the oilfield
services industry we believe there is little scope for cost
reductions. Nevertheless, there is still some room and margins will
be further squeezed in the battle to win work in a slow market.
We will undoubtedly see layoffs and bankruptcies as companies
struggle to survive and operators continue to seek immediate price
reductions, perhaps at the expense of the long-term health of their
supply chains.
Turning now to the individual markets of the UOCI, we have
summarized their state below and full assessments are in the latest
report.
Operations labor: Operating labor wages are unlikely to drop
immediately, however low prices throughout 2020 would likely result
in a deceleration in real wage growth and decreased
employment.
Consumables: Prices for chemicals involved in oil and gas
production are expected to fall due to both decreased demand and
lower feed costs.
Facilities inspection and maintenance: In the immediate term,
maintenance activity is likely to remain unchanged because ongoing
activities must be completed. However, many operators are adjusting
their operating budget to a lower oil price through the end of the
year, which will eventually result in reduced maintenance
activity.
Installation vessels (DSV/ROVSVs): Costs have very little room
to fall as they never experienced any measure of recovery since the
drop in offshore activity in 2015.
Aircraft: There will be a short-term dip in helicopter demand
as operators limit the number of offshore workers in order to stem
the spread of COVID-19 while maintenance campaigns and other
activities that are deemed "unessential" are postponed.
Supply services: Supply services are exposed to currency
fluctuations which are likely to be highly volatile in the coming
quarters.
Support vessels: Any reduction in day rates will come as this
market deteriorates and suppliers begin to offer desperately low
rates in order to meet short-term survival goals.
Well services: E&P capital allocation will likely be
diverted away from well completions and drilling will likely be
reduced. Workover rig demand will modestly decline, as operators
will not complete wells in order to balance cash flow.
Well materials: Pricing in the Middle East will be least
affected owing to sustained activity.
Specialty vessels: There is little room for day rates to fall
so even a sharp drop in demand should not materially affect
specialty vessel costs.
