The coronavirus pandemic has shocked many extractive industry supplier markets. Lockdowns, quarantines and social distancing practices are driving up supplier costs just as global plunges in the prices of most commodities are causing operators to slash spending by as much as 25 percent in the petroleum sector and 20 percent in mining.
These shocks come at an already difficult time. Many suppliers—particularly those in the petroleum sector—never fully recovered from the 2014 downturn. Bankruptcies are on the rise. In the offshore drilling sector, casualties already include Valaris, the largest offshore driller by fleet size, as well as Noble Corporation and Diamond Offshore Drilling. With $66 billion of debt weighing on the oilfield services sector alone, many more extractive industry suppliers will likely go under.
As this happens, supplier workforces are being reshaped by job cuts, automation and a shift to technologies that replace onsite labor with remote work. The world’s largest oilfield services company, Schlumberger, is shedding 21,000 jobs or one-fifth of its total workforce, just as it has increased remote drilling support by 25 percent.
In the mining sector, an IISD employment risk analysis shows that suppliers are most at risk of losing jobs at each step of the value chain. Service providers ABB and FLSmidth have signaled that changes similar to those in oil services are afoot.
Costs. Two downturns in quick succession have forced suppliers to reduce their prices. But experience suggests that when commodity prices bounce back, suppliers will charge more again: to take just one example, between 2004 and 2014, offshore rig rates for floating units swelled from $90,000 to $540,000 per day. With bankruptcies removing competition, it is possible that those firms that survive this downturn will have greater ability to control prices than their predecessors. Preventing runaway costs is key for citizens to benefit from future oil, gas and mining projects.
Corruption and mismanagement. Major scandals such as Lava Jato and Unaoil demonstrate that supplier contracts were already a major node for extractive industries corruption before the pandemic. But faced with dwindling demand, some suppliers may employ illicit means to secure increasingly vital contracts, raising ethical concerns. Moreover, Rystad warns that the loss of many hard-to-replace skilled and experienced employees in supplier layoffs could leave some firms with reduced capacity to identify and manage operational risks when demand returns, increasing the likelihood of quality, health, safety and environmental problems.