It’s been a volatile year for those working in the oil and gas sector with the threat of a recession adding to uncertainty over demand.
We’ve seen a range of responses from energy businesses:
- cost-cutting
- reductions in capital expenditure
- refocusing towards renewables
- consolidation
We've been called on by several companies to help them mitigate the risks and financial impacts on their sector from multiple challenges.
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The state of the energy sector
Last year started well for the oil and gas sector, with positive signs of recovery from the previous downturn. But an oil price war followed by a rapid drop in worldwide demand due to COVID-19 soon saw prices falling below $20 per barrel.
In response, exploration and production companies started cutting costs, significantly reducing capital expenditure (CAPEX) and delaying or cancelling projects to improve liquidity. This placed severe pressure on the supply chain where many companies already had thin margins and stretched balance sheets.
Certain sub-sectors have been particularly exposed, such as drilling and parts of subsea, where there is significant excess capacity and businesses are typically asset-heavy and highly leveraged.
A number of these have already been restructured, with more to come. The downstream sector has also been severely impacted, with a significant reduction in demand for key refined products, such as jet fuel.
Oil and gas is also combatting negative investor and lender sentiment due to poor historic returns and heightening environmental, social, and governance (ESG) concerns and regulations driving energy transition.
Many of the major international oil companies are re-organising, rebranding and refocusing on greener options. They're also looking at how their skills and assets can be used for emerging areas, such as hydrogen and carbon capture and storage (CCS).
We've started to see consolidation of some larger independent exploration, production and service companies – a trend that we expect to continue through 2021 to deliver benefits of scale and diversity.
Although oil prices have started 2021 at much healthier levels, another difficult year lies ahead for the oil and gas sector. A number of businesses will be at risk as debts start to mature, government support measures end and the full impact of the CAPEX cuts hit the supply chain with significantly reduced activity in certain areas.
Meanwhile, renewables will be further boosted by the UK government’s Ten Point Plan to generate a green industrial revolution with the target of net zero by 2050.
