PESA Members heard expert analysis on dealing with challenges raised by the COVID-19 pandemic during a fast-paced webinar hosted by the Legal and Supply Chain Committees on July 16. The panel discussed legal and compliance issues, global supply chain management, force majeure and contracts, cybersecurity and data privacy, and issues around returning to the office.
Panelists included Paul Fredrick, Schneider Electric, and Li Yan, Boston Consulting Group. The discussion was moderated by PESA Legal Chair Dan Connelly, Senior Commercial Counsel – Oilfield Equipment, Baker Hughes.
Yan opened the discussion by sharing insights on the new reality for procurement and the oil and gas supply chain given the pandemic and low oil prices. Yan shared analytics from a recent Boston Consulting Group publication, A New Reality for Oil and Gas Procurement and Supply Chains, showing that the current crisis is much worse than 2014 because of supply chain disruptions and overall OFS financial health.
She said initial operator price cut requests have ranged from 20-35%, which means 60-80% of suppliers will face bankruptcy risk if oil prices remain low until the end of 2020. Yan said that in the short term procurement and supply chain management organizations need to emphasize transparency and respond rapidly to mitigate supplier distress. In the medium term, operators and OFS players will need to partner strategically to lower costs by 20-50% to thrive in the new normal.
BGC’s worldwide analysis covered 10 categories and addressed four topics:
- Supplier financial impact
- Supply chain distress
- Short-term response levers
- Collaboration mechanisms
The results clearly show aggressive price cut requests, but some operators understand the need to work collaboratively to reduce risk and cut overall procurement costs. Transparency on supplier health, rapid supplier distress response and proactive communication will help companies create mutually beneficial partnerships in the short term.
This could prove beneficial in the future and lead to building flexible but resilient long-term partnerships and collaborations.
Fredrick discussed best practices regarding force majeure since the start of the pandemic. He said early force majeure claims were deemed valid, but claims were no longer seen as credible as weeks went by and companies had the time to strategize. Increasingly, such claims are viewed as an effort to get out of a contractual agreement.
Many organizations did not think the crisis would last beyond a few months and may have missed their window. Letters claiming force majeure sent in late Q2 and early Q3 became less and less plausible.
“The strength of long-term relationships and communication during this time is critical,” Fredrick said.
During a Q&A session, Yan and Frederick said the unexpected shot to oil and gas supply and demand, as well as disruptions within the global supply chain, were placing enormous pressure on small, financially fragile suppliers. These challenges affect operators and service providers, which facing similar financial concerns.
In some ways, OFS companies are in better position to weather this downturn than they were in 2014, Yan and Frederick said. Operators are more in tune with how the supply chain works and all parties have a better idea of the information flow needed to manage a crisis.
OFS companies should emphasize analytics, fully understand operating margins and use their digital transformation to transparently share data with operators and partners.
“Operators are making more informed, smarter decisions and suppliers are better prepared when approached about cutting costs,” Yan said.
The panel closed with discussion of the short and long-term effects of current crisis. Short-term, it’s unlikely that demand and production returns to where it was pre-pandemic. In the long-term companies should maintain focus on managing costs, and both operators and service companies should engage in transparent communication to strengthen relationships and form strong partnerships.
For more information on PESA’s Legal and Supply Chain Committees, please contact PESA VP Strategy and Programs Molly Determan.