Company Impacts of International Price Wars: The Roller Coaster Effect
The Saudi-Russian price war and global spread of the Coronavirus have caused international disruption – impacting all levels of the oil and gas supply chain and shocking the energy industry amid already low prices. Oil prices are expected to continue to decline following the collapse of OPEC+ negotiations, personal travel cut-backs, and the 30-day European travel ban enacted by President Trump earlier this week.
Natural Gas is at an all-time low. Companies are concerned they cannot drill profitably, especially those with heavy unconventional drilling programs, major cash constraints, or above-average debt loads. No matter your situation or current asset lifecycle, you can take measures to protect your assets, react responsibly, and mitigate risk. Many operators have already experienced severe losses, but the oil and gas industry is resilient and will once again “prove themselves nimble and innovative in challenging times,” as the President of TXOGA eloquently puts it. To find new opportunities to lower operating costs, I encourage you to look in the lifeblood of your business, your lease, and contractual agreements, for answers.
Three key operational snapshots across a given asset in these market conditions can be described as:
1. Continuous Development
It goes without saying, but you must understand all Continuous Development and continuous operations requirements across your leasehold/asset, begin to evaluate -what level of operational efforts must be carried out to be in compliance and understand the penalties and saving mechanisms of doing so. What’s it really take to maintain and save the economic value across an asset? You need to know where you can cut back and the economic implications of doing so, and you need to know now.
2. Shut-in Restrictions and Limitations
Less than favorable commodity pricing has every business strategy team yearning to halt all other sources of production. Successful shut-in programs are possible with proper evaluation and planning. The reality of heavily negotiated lease forms paints a shut-in landscape filled with landmines like restrictions for uneconomic pricing, cumulative and consecutive duration limitations, and hefty maintenance obligations. Evaluating your assets through the lenses of increased storage and decreasing production is the immediate action your team can take to limit the risk of contract violation in the process.
3. Force Majeure: Beyond Their Control / Regulation / Pandemic / Epidemic/ Lack of Market
You may not be able to renegotiate drilling obligations due to low oil prices, but there may be an opportunity to respond to current contractual obligations based on the current COVID-19 implications. In your lease agreements, vendor and supplier contracts, and more, review the Force Majeure contract clause to see if the COVID-19 situation is explicitly covered (e.g. ‘epidemic’; ‘pandemic’; ‘quarantine, ‘lack of market’) or if it is covered by a catch-all. Engage in further review to see what the result of a force majeure event is (e.g. termination; postponement or suspension of duties). This could potentially have a major impact on your bottom line.
- Definition of production in paying quantities
- Operations days banking
- Definition of operations
- Offset obligations
- Volume commitment
- Low-volume fees
- Insufficient gas
- Gas Storage
- Uneconomic pricing
We understand that surfacing information from your leases and complex documents is much easier said than done if you do not have the technology in place to bring this information to light very quickly. If you do not have the resources to hire another team or dedicate 100% of internal staff to manually reviewing every lease or document, feel free to reach out and our team would be happy to help.
ThoughtTrace AI-powered software serves as an asset management and operational insights platform that delivers results in minutes, as opposed to weeks, months, or years of time conducting review and analysis. If you watched the examples above, you saw how ThoughtTrace found vital provisions across thousands of documents in less than 2 minutes combined. Today more than ever, teams must accelerate the process of surfacing fact patterns, lease provisions, and generate a clean system output in order to make the most responsible, profitable decisions.