Coronavirus breeds uncertainty for oil and gas

Rob Thissen, energy sector leader for the Middle East at Mercer, comments on the uncertainty ahead

Coronavirus, Covid-19, Oil price, OPEC

The global oil and gas sector finds itself in yet another crisis, a common phenomenon seen in the industry.  However, this time we are facing a double whammy featuring a steep decline in demand as well as the added downward pressure on oil prices on the back of disagreements between Saudi Arabia and Russia. When this article was written on the 12th of April 2020, both countries, as part of OPEC+ agreed to reduce supply by roughly 10%, however doubts still remain about whether current oil prices can be maintained in the midst of a pandemic.

The only certainty we see ahead is a renewed period of uncertainty. Many industry players as well as governments across the region have already started implementing measures and budget cuts. To provide context, Mercer’s COVID-19 & Oil Price Decline poll, which ran with 193 companies across the energy sector in the second half of March, found that on average companies’ budgets for 2020 were based on USD 53.42 per barrel of Brent crude. In addition, more than 60% of participating companies expected the crisis to have a substantial to high impact on their 2020 corporate performance, with the Middle East and Africa participants being less optimistic, with over 80% expecting a substantial to high impact. Consequently, major oil companies already announced drastic capex reductions, while shifting their focus to operational expenses.

The COVID-19 & Oil Price Decline survey also captured the types of measures companies have already implemented as well as the ones currently under discussion. Roughly half of global and MEA participants are currently considering options such as reducing headcount and salary freezes, while hiring pauses have been implemented by 38% of companies in MEA compared to 34% globally.

Notably, in an ever-changing environment these figures are likely to be higher at the moment of the publication of this article, and since the end of March many companies, particularly in the US but also in our region, have publicly announced their response to the crisis. Oftentimes, these consist of a combination of headcount and pay related measures, with companies frequently mentioning to be thinking of a reduction in executive packages. This finding is not exclusive to our industry, as 33% of companies across the Middle East are considering a form of executive pay reduction, as per Mercer’s latest COVID-19 General Market survey.

We cannot forgo mentioning the differences we are seeing across the sub-segments of the industry. While a clear majority of our oilfield services clients are considering, or have already implemented, reductions in workforce such as lay-offs and furloughs, the downstream and petrochemical sectors are –unsurprisingly - less impacted, with the only measure considered by a large proportion of this industry sub-segment being headcount freezes.

Although these figures do not paint a positive picture for the industry, for most companies in the Middle East’s oil and gas industry their number one priority remains business continuity. HR leaders are involved in companies’ crisis management, while their teams focus on ensuring that operations continue to run smoothly. Challenges faced by the industry include the administration of permits to be able to keep operations from grinding to a halt, while ensuring they are COVID-19 free. To curb the latter, 63% of companies in the Middle East have implemented voluntary testing or have studied the potential exposure of essential employees.

In addition, several companies are forced to find creative solutions with regards to their employees’ work schedules and pay practices, now employees are often unable to travel, both across borders or between states and provinces. This situation mainly affects the upstream and oilfield services sectors that rely heavily on internationally rotating staff.

As the industry is starting to adjust to a new normal from an operations perspective, some companies have already shifted their focus to the engagement of employees that are able to work remotely.
According to Mercer’s COVID-19 & Oil Price Decline poll, 43% of energy companies around the world have established regularly scheduled videoconferencing calls in the form of “hang outs” to give employees a sense of community, while 27% have established virtual wellness moments for remote workers, such as meditation and exercise classes, and 21% have been encouraging employee led communications on how to thrive while in quarantine.

Clearly, the focus is on wellness, maintaining frequent communication with employees and understanding their worries and needs within this new environment. The latter is particularly important in our industry, given not only the direct implications of COVID-19 but also the expected financial impact down the line.

The coming period will not be easy for an industry which has been struggling to uphold an attractive employer brand since the 2014 oil price decline and due to growing environmental concerns. In order to succeed during and after COVID-19, oil and gas companies will need to go the extra mile to retain critical staff while ensuring their wellbeing and engagement.

Mercer’s Energy vertical will keep on surveying the industry on people related measures taken to combat COVID-19, to support our clients’ decision-making and sustainable management of the crisis.

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