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Offshore Enters Uncharted Waters

Source: Getty Images.

Someone once said, “It is the thing we least expect that hits us the hardest.” For the offshore oil and gas industry, which has become somewhat accustomed to being hit hard by unforeseen circumstances during its 70-plus-year history, the events of March are unprecedented. Within the space of 3 weeks, coronavirus became a worldwide pandemic; demand—and with it, prices—for oil plummeted; and Saudi Arabia and Russia decided to flood the world market with oil instead of agreeing on an amount by which to curtail production.

For the offshore sector, the latest oil-price rout came just as the market was beginning to look up after some operators had cut costs by more than 50% since 2016, and industry executives and analysts were forecasting annualized revenue growth of 9% from 2019 to 2023.

“We’re only thinking about survival now,” said the chief financial officer of one Scandinavian offshore major after the price of Brent crude dropped 23% in a single session, to $35.01/bbl. (At the time of writing, Brent was $32.62.)

Deutsche Bank analyst Chris Snyder said his company was exposed because it was banking on an acceleration in deepwater drilling. “This is a very unlikely proposition in the current landscape,” he told the Wall Street Journal on 9 March. The Saudi policy would be especially negative for deepwater development, Snyder explained, because developing these projects requires significant upfront capital expenditure (capex) and, thus, confidence in the commodity price outlook.

 As this article goes to press, the flooding of the world’s total oil production with an estimated extra 2.5 million B/D looms, leading toward one of the biggest oil supply gluts the world has ever seen. Rystad Energy predicts that the negative impact of COVID-19 on oil demand could amount to between 12 million and 16 million B/D over the next months as more people will have to be quarantined for a longer period, causing an even more dramatic impact on oil demand through the year.

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Offshore Enters Uncharted Waters

Judy Feder, Technology Editor

01 May 2020

Volume: 72 | Issue: 5

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