All dictators seem to use the same playbook. They lock up or kill their opponents, purge their enemies, censor the press, bend the judiciary to their will, and in the later stages, erect large statues of themselves whilst proclaiming that their people love them and need them.
So, too, the leading players in the oil and gas industry seem to end up following identical patterns of dismal behaviour in an industry downturn, all following the same energy industry playbook, and all claiming that they did it for the good of their companies.
Despite the recovery in the oil price since March, with Brent now trading back above $40 a barrel, the plunge in oil prices to below $20 saw the industry's recessionary script play out at turbo-charged speed. The impact is still being felt even as oil prices normalise.
The immediate response of the oil majors to the crash in oil prices was to cancel or suspend drilling contracts. BP announced it was slashing its 2020 capital spending by 25 per cent. The other majors announced similar cuts.
Who needs new reserves of oil and gas when the existing ones are selling at half-price and some fields are selling their product for less than the cash cost of production? Never before in human history has the rig count fallen so quickly, aided by the fact that the travel restrictions caused by the Covid-19 outbreak meant that crew moves were often impossible, allowing oil companies to claim "force majeure".
Chart Shipping, the offshore brokerage, estimates that the rig count in West and East Africa fell from 29 units working in January to just 15 active rigs in May, the lowest in three decades. In Angola, not one single rig was drilling offshore in May, for the first time since Douglas Westwood's database records began in 1983. In every region of the world activity plunged.
Broker Clarksons reported that, "OSV activity in the Mediterranean during April and May almost ground to a complete halt with postponed/suspended campaigns, vessel terminations, restricted personnel movement. This is evidenced by the very few new fixtures reported over the last two months, along with an increasing number of vessels finding themselves prompt without any prospect of work for the foreseeable future. We have seen 16 vessels in total leave the region… Despite the exits there are still ~27 prompt vessels of varying type and size, which will likely cause rates to tail off further as the weeks roll on."
Only two rigs remained working offshore Australia at the end of May, and none off New Zealand. Douglas Westwood reported that the rig count in Thailand stood at just four units, and that all drilling operations were cancelled or suspended in Myanmar by June 1. The UK Sector of the North Sea saw 15 rigs cancelled or suspended. Clarkson is now forecasting the number of working rigs in the North Sea will be between 43 and 46 through the coming summer, as opposed to 61 during the summer of 2019. So, like BP's overall capital spending, the broker is estimating a 25 per cent reduction in drilling demand there, compared to last summer.
In the previous downturn of 2015, rig and boat owners were reluctant to lay up vessels. After years of high oil prices, they could hardly believe that the good times were over, so they hung on keeping vessels warm stacked, and burning cash, rather than cold stack them and risk missing out on upside when the market recovered. This time around, owners of all hues have rushed to lay up vessels to conserve cash with alacrity.
Lay-up activity has been turbo-charged, with thirty seven PSVs laid up in the North Sea in the three months since the price crash, as rates fell to just £3,000 for cargo runs, and already stretched owners began to worry about their cash reserves. On top of units which remained cold stacked since the last downturn and had never gone back to work, close to sixty PSVs now lie idle in the fjords of Norway and the quays of Northern Europe.
And it wasn't just OSVs which were being laid up. PGS announced it was laying off three of the eight seismic vessels which it was operating in January. Subsea7 announced it was releasing chartered in vessels back to their lucky owners, and stacking some of its own ships, so that its active fleet of 32 vessels will be reduced by up to 10 vessels in the coming year.
It is a similar story at major construction and decommissioning player Allseas. The company announced that a lifetime extension programme planned for the construction vessel Solitaire, which is currently working on Energean's Karish project off Israel, will be completed at less than 50 per cent of the original work scope. Allseas said it expected the unit to face along period of lay up after the completion of the project in Karish and the yard work.
Interestingly, the collapse in offshore work has hit Allseas investment in deepsea mining, which we reported here. The company said it would be postponing a deepsea tests on the former Brazilian ultra-deepwater drillship Vitoria 10000, which it has renamed Hidden Gem. Instead of conducting sea trials, Hidden Gem will now be stacked for the year ahead. It will be laid up with skeleton manning alongside Allseas' pipelay vessel Lorelay in Kristiansand in Norway.
Once the rigs and boats were safely alongside, lights off, doors locked, the oil majors moved to purge their own staff, followed closely by subcontractors.
On June 8, the same day that Saudi Arabia's energy minister, Prince Abdulaziz bin Salman said he saw signs of "thriving" demand in the oil (see here), BP announced it was firing 10,000 staff, about 15 per cent of its workforce.
Bernard Looney, who became CEO in February, told the company's staff in a letter that, "we are spending much, much more than we make". He highlighted that BP had operating expenses of around US$22 billion annually — of which about US$8 billion was spent on what he described as "people costs". So, ten thousand of those people will be leaving the company, in addition to a cull of more than half of BP's top 250 senior managers which Looney announced last month.
Making 130 of the leadership team redundant would help the company to become "more nimble" he claimed, and would "de-layer" decision-making. Bloomberg reported that BP's net debt rose by US$6 billion in the first quarter of this year, even though the company paid out US$8 billion last year in dividend payments to shareholders. With his classic tin ear, Mr Looney had previously used the hashtag #inthistogether on social media (here). Ten thousand laid off staff might now disagree.
Chevron also announced that it would lay off "up to 15 per cent" of its global workforce in May. Chevron said it was "streamlining our organisational structures to reflect the efficiencies and match projected activity levels", so around six thousand of its 45,000 strong workforce would be leaving the company.
If the oil companies have been taking a Russian roulette approach to firing, taking out a random one in six of the workforce, service companies have faced even starker choices, using a machine gun rather than a pistol.
This week, seismic player PGS announced it was laying off 40 per cent of its office staff, mainly in Oslo. The company said its plan is to bring annual gross cash cost run-rate to approximately $400 million through staff reductions, reorganisation, consolidation of offices, re-negotiation of service agreements, and other cost measures.
"The Covid-19 pandemic and related disruption in the oil market have caused unprecedented challenges for the seismic industry and will temporarily cause a significant reduction of activity levels. PGS is responding to this challenge by further adjusting its cost base to the lower activity level while retaining its core global capabilities and ability to scale up when demand resumes," PGS said in a press release.
"In combination with other cost measures, this is expected to reduce the company's annual gross cash cost run rate to approximately $400 million compared to approximately $600 million as guided at the start of 2020," the company said. So, 40 per cent of the staff and 30 per cent of the cash cost, both gone with the sending of an email.
Subsea7 also announced at the end of May that it would reduce its workforce by 25 per cent, following up on the decision to axe the number of vessels in its fleet. In total, Subsea7 plans to lay off about three thousand workers, including both contractors and permanent employees in the coming thirteen months.
Construction company Allseas has decided that about one third of the its offshore marine crew of 850 will likely be made redundant, telling staff that the company, like them, "faced uncertain times".
Few companies were prepared to face such a steep fall in demand so quickly after five years of industry austerity. As a result, many major players are seeking to restructure or enter bankruptcy protection. Diamond Offshore Drilling and Hornbeck Offshore have already entered the process, along with McDermott. Rig owner Valaris is in default on a bond payment and is widely expected to file for Chapter Eleven before the grace period on the default expires. Both Seadrill and Pacific Drilling have already restructured once in the downturn. Now they look to be doing it again.
Seadrill announced that it would be delisting its shares from the New York Stock Exchange in June. The company's CEO, Anton Dibowitz told analysts that some of Seadrill's rigs are, "increasingly unlikely to return to the market and need to be scrapped," as the company took over US$1 billion in write-downs during the first quarter of 2020. He said that Seadrill has appointed financial and legal advisers to look at restructuring alternatives to handle the company's US$5 billion debt pile.
Dibowitz summarised the problem facing the entire offshore sector: "This industry has two fundamental challenges which are emphasised by recent events – there are too many rigs carrying too much debt. Assets across the industry also carry debt levels which are unlikely to be sustainable and consequently we should expect to see substantial indebtedness being converted to equity."
Unsurprisingly, several OSV and rig fleets are now being circulated for sale as weary lenders consider liquidation as an option.
This seems ironic just as the oil price recovers and the Saudis consider oil demand to be "thriving" as lockdowns ease.
But the industry works like a herd. Recovery will surely come, but in the meantime thousands will lose their jobs, and many companies will cease to exist in their current state. As George Orwell put it in 1984, "The object of waging a war is always to be in a better position in which to wage another war." So too with cost cutting and corporate restructuring.
