Jul 02 | 2020
From Famine to Feast as Unemployment Spikes
By Amy McLellan
It has become something of a 2020 cliché, but no one can dispute we live in unprecedented times. The oil, gas and construction sectors are no strangers to boom-and-bust cycles, yet the Covid-19 pandemic has delivered a scale of demand-side destruction and economic pain not seen before in peace time.
The resulting plunge in the oil price means dark days loom for oil companies and the contractors they employ. Even the biggest companies are cutting costs and shedding staff. Royal Dutch Shell has slashed its dividend by two-thirds, the first time since World War II. Major projects are being shelved until brighter times, with ExxonMobil pushing back the expected final investment decision, or FID, on its Rovuma LNG project in Mozambique until next year. BP has issued a force majeure notice to Golar LNG for the floating LNG facility for its Tortue Ahmeyim project in northwest Africa and there’s no update from Husky Oil on when work will resume on the massive concrete gravity structure for its West White Rose field offshore Nova Scotia. Smaller projects have also hit the brakes: Neptune Energy’s Seagull development in the North Sea will now be pushed back by 12 to 15 months and marginal fields may well be hastened on their way to decommissioning.
This was due to be a year of recruitment and recovery as the industry gathered steam following the last price slump. From East Africa to South America, companies were stepping on the gas with new exploration projects and taking FID on major new developments. But, with the arrival of Covid-19, companies are not looking at recruitment, but rather a period of serious and prolonged retrenchment.
Rather than human resource experts seeking out talent for far-flung projects, they are instead helping companies downsize as they seek to weather the storm. Instead of signing off on expat contracts, they are negotiating safe passage home for staff and arranging furlough packages – or worse – as workflows shrink. Already, industry lobby groups are warning of up to 30,000 job losses in the North Sea while the global oilfield services toll could be one million jobs, according to analysis by Oslo-based consultancy Rystad Energy.
Offshore Drillers Under Pressure
Rystad points out that oilfield services stocks have collectively lost half their value since the start of 2020. The most affected stocks are in offshore drilling, a segment that has nosedived by about 80 percent since the beginning of this year. Diamond Offshore has already delisted from the New York Stock Exchange and entered Chapter 11 bankruptcy protection while it restructures its balance sheet to find a more sustainable debt level. UK-based Valaris, formerly EnscoRowan, has warned of losses and negative cash flows through the remainder of the year, and is mulling alternatives to address its capital structure given its debt pile of US$6.8 billion.
“The result of this crisis will likely be more financial restructuring and consolidation to right-size the capital base across the service segments,” said Rystad Energy analyst Binny Bagga. “Additionally, we will see more companies cancelling dividend payments and resorting to poison pills and reverse stock splits as the time goes by.”
The best performers were in the engineering, procurement, construction and installation, or EPCI, sector, which only saw market capitalization drop by 27 percent, largely because a significant proportion of these companies are more diversified, with exposure in multiple geographies or have revenues from non-oil-and-gas industries. Large EPCI companies also tend to have longer average contract cycles, which means they remain busy on existing contracts even if new sanctioning activity is low.
This diversity is already playing in Wood Group’s favor, with the global engineering and consulting company picking up more work from one industry that is booming during the crisis: big pharma. The Aberdeen-headquartered group has won a three-year contract as the capital delivery partner by GlaxoSmithKline (GSK) for its Ware site in Hertfordshire, building on a previous decade-long relationship providing engineering and design services to GSK’s global sites.
Dave Stewart, CEO of Wood’s asset solutions business in Europe, Africa, Asia and Australia, said the contract was “another significant step in leveraging our global engineering capability and cross-sector experience to diversify our portfolio in the UK, specifically in the life sciences sector.”
Major EPCI companies are continuing to pick up work throughout the crisis, some of which are the result of deals signed in 2019, some of which are new and result from these companies having the resources and processes to continue operating safely during the pandemic. Italy’s Saipem, for example, has in April and May alone announced contracts that include a two-year engineering services agreement with Equinor, a US$150 million contract in Egypt’s petrochemicals sector, the transportation and installation of the Baltic Pipe Project between Poland and Denmark and the US$2.7 billion EPC deal for Nigeria LNG Train 7.
The group’s early response to Covid-19 meant it has been able to maintain its ongoing project activities. “Our construction sites and vessels have remained operative thanks to our resilience – proven over the years – to the flexibility of our organizational model and the practice of our people to work remotely,” said a spokesperson.
Keeping Crews Safe
While office workers have had to adapt to home working, there have been additional challenges for those at sea or on site. In the U.S., the situation has been complicated by a myriad of rules in different states.
“It has been complicated with the travel restrictions in some states, where you have to go through checkpoints and have to have the right paperwork to travel,” explained Danny Cain, director of safety/risk management at specialist haulage and rigging company Edwards Moving & Rigging, which has been kept busy throughout the crisis as a designated essential business. “Then, all the hotels and restaurants might be closed when we need to find accommodation and nourishment for our crews. It’s changing all the time.”
Like many other companies, Kentucky-based Edwards Moving & Rigging quickly reorganized crews into separate five-man pods to ensure business continuity in the case of infection and has applied strict infection control and sanitation methods to protect workers and clients. “We also have to make sure we’re compliant with rules on customer sites,” Cain said.
Even with many states in the U.S. now lifting lockdowns, Cain sees no immediate return to normal. “This will be a watershed like 9/11,” he said. “Life will change with ongoing social distancing and sanitizing.”
Dutch shipping and heavy-lift company Jumbo Maritime set up a Corona Crisis Team, or CCT, in the early days of the pandemic in order to monitor the situation and find proactive solutions. The CCT brings together members from health, safety and environment; crewing; human relations; operations; and the captain of the different vessels to ensure there’s daily contact between the crisis team and the vessel. Additional personal protective equipment, or PPE, including oxygen and disinfectant gels, has been purchased for vessels to give crew maximum protection, while new ways of working have been found to remove operational bottlenecks, such as finding ways for remote auditing for vessel certification or minimizing the number of ports used.
“Crew changes are one of the biggest challenges and can be a real puzzle for the crewing department,” said Johan Wulder, manager QHSE, at Jumbo Maritime.
The company had already been investing in digital processes, which made the transition to home-working relatively easy for office staff.
“For the vessels, it is a daily reinventing what is possible in a changing world on a changing location: each port, has different expectations, which changes over time,” Mulder said. This has involved detailed advanced planning with Jumbo, crew, local agents and authorities, which is taking a lot of effort, but so far there has been nothing they haven’t been able to overcome.
Staff Awareness
Managing staff during this crisis isn’t just a matter of having the right PPE and processes in place. “We are doing regular staff surveys to monitor the mood of all our staff, and check that people have all the information, tools and equipment they need to do their job,” Mulder said. “It’s also about care, having regular personal letter and daily Zoom coffee-time (bring your own coffee) to catch up on the gossip. It’s about trust, giving people freedom to plan their work the way it best fits, and understanding it is OK to be less effective than in the office.”
This is echoed by Dan Leach, projects team manager at Hemisphere Freight Services, which provides freight forwarding, logistics and specialist shipping. “We’re definitely spending more time on the phone with one another, not just talking about work but also checking up on one another,” Leach said, adding the company had already been in the process of updating systems to allow more flexible working which helped with the sudden transition to home working. “In general people have reacted really well, but we are mindful of how different this is so we’re keeping an eye on people and their state of mind.”
Hemisphere has stayed busy throughout the period. “Our diversity has been our strength,” Leach said, “because as one area has been quiet others have kept going. And we’re now seeing factories in China reopening, and projects there that were postponed are coming back again.”
Already the company has its eye on what the future holds. “People will have been away from the office for a long time and we will only bring them back in a phased manner to make sure it’s safe,” he said. “I think people will need more support when they come back, and it will take some time to adapt and we’re going to have to be mindful of that.”
Jumbo’s Wulder agrees. “We are already planning for what we call in the Netherlands, ‘the new normal life,’” he said. “How to do business in the coming 18 months, when lockdown is over but there’s no vaccine ready yet.”
Companies are clear that the current crisis is going to accelerate the ongoing digitization of the industry and the uptake of new technologies, such as AI and automation.
“Our first overview of this novel work phenomena highlights that new operating protocols are needed, to integrate with the innovative technologies that we were already developing before the pandemic,” said the Saipem spokesperson, highlighting the increased role of digital and robotic technology, punctual reading and management of digital data, development of digital models and replicas to manage remote working and service provision. “The use of smart working is a formidable and now essential solution for doing business in a flexible and dynamic way.”
China Back Online
Companies are unwilling to discuss what impact the growing role of digitization, AI and automation will have on jobs. For now, they are still in crisis mode, focused on keeping employees safe and their businesses afloat in a turbulent world.
There are glimmers of hope: China, one of the engines of global GDP growth and the first to be hit by Covid-19, is coming back online, with analysts at Wood Mackenzie expecting oil demand there to recover to 13 million barrels per day in the second quarter of 2020, a 16 percent jump compared with the catastrophic first quarter.
“Since April, the Chinese government has gradually lifted the coronavirus containment measures,” said Yuwei Pei, Wood Mackenzie research associate. “Specifically, China is now easing restrictions on social, commercial and travel activities. More people are returning to the office after a period of telecommuting. In addition, private car use is now seen as the safest mode of mobility, shifting passengers from public transport to private cars.”
This is generating a quick recovery in gasoline and diesel demand. Jet fuel demand, however, is expected to continue to fall as passengers remain wary of international travel. According to Fitch Ratings, bulk cargo and container throughput handled by Chinese ports fell by 2.4 percent and 5 percent, respectively, in March and could worsen as a result of recession in the U.S. and Eurozone. Analysts will be watching China closely in the coming months as the litmus test of demand-side recovery and whether similar upticks in activity are seen in Europe and the U.S. as lockdowns are relaxed. In the meantime, companies will continue to operate safely in the “new normal” but it’s clear recruitment will be on hold until the future looks more certain.
Freelance journalist Amy McLellan has been reporting on the highs and lows of the upstream oil and gas and maritime industries for 20 years.
Image credit: Shutterstock
It has become something of a 2020 cliché, but no one can dispute we live in unprecedented times. The oil, gas and construction sectors are no strangers to boom-and-bust cycles, yet the Covid-19 pandemic has delivered a scale of demand-side destruction and economic pain not seen before in peace time.The resulting plunge in the oil price means dark days loom for oil companies and the contractors they employ. Even the biggest companies are cutting costs and shedding staff. Royal Dutch Shell has slashed its dividend by two-thirds, the first time since World War II. Major projects are being shelved until brighter times, with ExxonMobil pushing back the expected final investment decision, or FID, on its Rovuma LNG project in Mozambique until next year. BP has issued a force majeure notice to Golar LNG for the floating LNG facility for its Tortue Ahmeyim project in northwest Africa and there’s no update from Husky Oil on when work will resume on the massive concrete gravity structure for its West White Rose field offshore Nova Scotia. Smaller projects have also hit the brakes: Neptune Energy’s Seagull development in the North Sea will now be pushed back by 12 to 15 months and marginal fields may well be hastened on their way to decommissioning.
This was due to be a year of recruitment and recovery as the industry gathered steam following the last price slump. From East Africa to South America, companies were stepping on the gas with new exploration projects and taking FID on major new developments. But, with the arrival of Covid-19, companies are not looking at recruitment, but rather a period of serious and prolonged retrenchment.
Rather than human resource experts seeking out talent for far-flung projects, they are instead helping companies downsize as they seek to weather the storm. Instead of signing off on expat contracts, they are negotiating safe passage home for staff and arranging furlough packages – or worse – as workflows shrink. Already, industry lobby groups are warning of up to 30,000 job losses in the North Sea while the global oilfield services toll could be one million jobs, according to analysis by Oslo-based consultancy Rystad Energy.
Offshore Drillers Under Pressure
Rystad points out that oilfield services stocks have collectively lost half their value since the start of 2020. The most affected stocks are in offshore drilling, a segment that has nosedived by about 80 percent since the beginning of this year. Diamond Offshore has already delisted from the New York Stock Exchange and entered Chapter 11 bankruptcy protection while it restructures its balance sheet to find a more sustainable debt level. UK-based Valaris, formerly EnscoRowan, has warned of losses and negative cash flows through the remainder of the year, and is mulling alternatives to address its capital structure given its debt pile of US$6.8 billion.
“The result of this crisis will likely be more financial restructuring and consolidation to right-size the capital base across the service segments,” said Rystad Energy analyst Binny Bagga. “Additionally, we will see more companies cancelling dividend payments and resorting to poison pills and reverse stock splits as the time goes by.”
The best performers were in the engineering, procurement, construction and installation, or EPCI, sector, which only saw market capitalization drop by 27 percent, largely because a significant proportion of these companies are more diversified, with exposure in multiple geographies or have revenues from non-oil-and-gas industries. Large EPCI companies also tend to have longer average contract cycles, which means they remain busy on existing contracts even if new sanctioning activity is low.
This diversity is already playing in Wood Group’s favor, with the global engineering and consulting company picking up more work from one industry that is booming during the crisis: big pharma. The Aberdeen-headquartered group has won a three-year contract as the capital delivery partner by GlaxoSmithKline (GSK) for its Ware site in Hertfordshire, building on a previous decade-long relationship providing engineering and design services to GSK’s global sites.
Dave Stewart, CEO of Wood’s asset solutions business in Europe, Africa, Asia and Australia, said the contract was “another significant step in leveraging our global engineering capability and cross-sector experience to diversify our portfolio in the UK, specifically in the life sciences sector.”
Major EPCI companies are continuing to pick up work throughout the crisis, some of which are the result of deals signed in 2019, some of which are new and result from these companies having the resources and processes to continue operating safely during the pandemic. Italy’s Saipem, for example, has in April and May alone announced contracts that include a two-year engineering services agreement with Equinor, a US$150 million contract in Egypt’s petrochemicals sector, the transportation and installation of the Baltic Pipe Project between Poland and Denmark and the US$2.7 billion EPC deal for Nigeria LNG Train 7.
The group’s early response to Covid-19 meant it has been able to maintain its ongoing project activities. “Our construction sites and vessels have remained operative thanks to our resilience – proven over the years – to the flexibility of our organizational model and the practice of our people to work remotely,” said a spokesperson.
Keeping Crews Safe
While office workers have had to adapt to home working, there have been additional challenges for those at sea or on site. In the U.S., the situation has been complicated by a myriad of rules in different states.
“It has been complicated with the travel restrictions in some states, where you have to go through checkpoints and have to have the right paperwork to travel,” explained Danny Cain, director of safety/risk management at specialist haulage and rigging company Edwards Moving & Rigging, which has been kept busy throughout the crisis as a designated essential business. “Then, all the hotels and restaurants might be closed when we need to find accommodation and nourishment for our crews. It’s changing all the time.”
Like many other companies, Kentucky-based Edwards Moving & Rigging quickly reorganized crews into separate five-man pods to ensure business continuity in the case of infection and has applied strict infection control and sanitation methods to protect workers and clients. “We also have to make sure we’re compliant with rules on customer sites,” Cain said.
Even with many states in the U.S. now lifting lockdowns, Cain sees no immediate return to normal. “This will be a watershed like 9/11,” he said. “Life will change with ongoing social distancing and sanitizing.”
Dutch shipping and heavy-lift company Jumbo Maritime set up a Corona Crisis Team, or CCT, in the early days of the pandemic in order to monitor the situation and find proactive solutions. The CCT brings together members from health, safety and environment; crewing; human relations; operations; and the captain of the different vessels to ensure there’s daily contact between the crisis team and the vessel. Additional personal protective equipment, or PPE, including oxygen and disinfectant gels, has been purchased for vessels to give crew maximum protection, while new ways of working have been found to remove operational bottlenecks, such as finding ways for remote auditing for vessel certification or minimizing the number of ports used.
“Crew changes are one of the biggest challenges and can be a real puzzle for the crewing department,” said Johan Wulder, manager QHSE, at Jumbo Maritime.
The company had already been investing in digital processes, which made the transition to home-working relatively easy for office staff.
“For the vessels, it is a daily reinventing what is possible in a changing world on a changing location: each port, has different expectations, which changes over time,” Mulder said. This has involved detailed advanced planning with Jumbo, crew, local agents and authorities, which is taking a lot of effort, but so far there has been nothing they haven’t been able to overcome.
Staff Awareness
Managing staff during this crisis isn’t just a matter of having the right PPE and processes in place. “We are doing regular staff surveys to monitor the mood of all our staff, and check that people have all the information, tools and equipment they need to do their job,” Mulder said. “It’s also about care, having regular personal letter and daily Zoom coffee-time (bring your own coffee) to catch up on the gossip. It’s about trust, giving people freedom to plan their work the way it best fits, and understanding it is OK to be less effective than in the office.”
This is echoed by Dan Leach, projects team manager at Hemisphere Freight Services, which provides freight forwarding, logistics and specialist shipping. “We’re definitely spending more time on the phone with one another, not just talking about work but also checking up on one another,” Leach said, adding the company had already been in the process of updating systems to allow more flexible working which helped with the sudden transition to home working. “In general people have reacted really well, but we are mindful of how different this is so we’re keeping an eye on people and their state of mind.”
Hemisphere has stayed busy throughout the period. “Our diversity has been our strength,” Leach said, “because as one area has been quiet others have kept going. And we’re now seeing factories in China reopening, and projects there that were postponed are coming back again.”
Already the company has its eye on what the future holds. “People will have been away from the office for a long time and we will only bring them back in a phased manner to make sure it’s safe,” he said. “I think people will need more support when they come back, and it will take some time to adapt and we’re going to have to be mindful of that.”
Jumbo’s Wulder agrees. “We are already planning for what we call in the Netherlands, ‘the new normal life,’” he said. “How to do business in the coming 18 months, when lockdown is over but there’s no vaccine ready yet.”
Companies are clear that the current crisis is going to accelerate the ongoing digitization of the industry and the uptake of new technologies, such as AI and automation.
“Our first overview of this novel work phenomena highlights that new operating protocols are needed, to integrate with the innovative technologies that we were already developing before the pandemic,” said the Saipem spokesperson, highlighting the increased role of digital and robotic technology, punctual reading and management of digital data, development of digital models and replicas to manage remote working and service provision. “The use of smart working is a formidable and now essential solution for doing business in a flexible and dynamic way.”
China Back Online
Companies are unwilling to discuss what impact the growing role of digitization, AI and automation will have on jobs. For now, they are still in crisis mode, focused on keeping employees safe and their businesses afloat in a turbulent world.
There are glimmers of hope: China, one of the engines of global GDP growth and the first to be hit by Covid-19, is coming back online, with analysts at Wood Mackenzie expecting oil demand there to recover to 13 million barrels per day in the second quarter of 2020, a 16 percent jump compared with the catastrophic first quarter.
“Since April, the Chinese government has gradually lifted the coronavirus containment measures,” said Yuwei Pei, Wood Mackenzie research associate. “Specifically, China is now easing restrictions on social, commercial and travel activities. More people are returning to the office after a period of telecommuting. In addition, private car use is now seen as the safest mode of mobility, shifting passengers from public transport to private cars.”
This is generating a quick recovery in gasoline and diesel demand. Jet fuel demand, however, is expected to continue to fall as passengers remain wary of international travel. According to Fitch Ratings, bulk cargo and container throughput handled by Chinese ports fell by 2.4 percent and 5 percent, respectively, in March and could worsen as a result of recession in the U.S. and Eurozone. Analysts will be watching China closely in the coming months as the litmus test of demand-side recovery and whether similar upticks in activity are seen in Europe and the U.S. as lockdowns are relaxed. In the meantime, companies will continue to operate safely in the “new normal” but it’s clear recruitment will be on hold until the future looks more certain.
Freelance journalist Amy McLellan has been reporting on the highs and lows of the upstream oil and gas and maritime industries for 20 years.
Image credit: Shutterstock
