How Are Upstream Companies Dealing With Hits To Supply & Demand In The Oil Market?

John Echols shares his thoughts regarding how upstream oil & gas companies can address an oversupplied crude oil market and other key challenges.

June 2020

Key Points:

  • Oil and gas producers continue to operate within a volatile energy market.
  • Due to changes in market conditions, reserve-based lenders must take an aggressive posture.
  • E&P companies must live within their means until demand picks up to justify drilling again.

The oil and gas industry is known to be a boom and bust business.

John Echols is an expert in the field and says the current difficult period for everyone, particularly upstream companies in the industry is the most difficult he’s seen in more than 30 years.

“Usually our problems have stemmed from oversupply. This one has an oversupply factor and an under-demand factor,” he said. “None of us have ever seen this. None of us have ever seen the world economy shut down. I think it’s particularly harsh.”

The oversupply comes from disagreements in the OPEC+ countries, with Saudia Arabia and Russia among the nations who have been loath to cut back on supply.

However, during the COVID-19 pandemic, a lack of flights due to travel restrictions and a legion of workers now staying at home rather than driving to the office drove demand lower than any time in recent memory.

“Usually our problems have stemmed from oversupply. This one has an oversupply factor and an under-demand factor. None of us have ever seen this. None of us have ever seen the world economy shut down. I think it’s particularly harsh.”

That means a time of belt-tightening for upstream companies, which Echols said need to spend within their means and make tough choices about new projects and staffing, especially with the security of a reserve-based loan challenge before the low prices.

“If you think about the DNA of an oil and gas company, they’re built to drill. That’s what they like to do. It’s what they’re paid to do. They’re successful when they do it well. So, to say to an upstream company, ‘You don’t need to drill. You can’t drill.’ It’s really against the DNA of the company, but the reality is there is very limited or no access to capital and the price of our core commodity in crude at least is so weak that many of the things you’d like to drill probably aren’t economic,” he said.

Demand could be back on the rise with countries beginning to lift regulations with the spread of COVID-19 slowed in some regions. Even so, after such a difficult start to 2020 many companies may simply be forced to ride it out until the next boom period begins.

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A headshot of John Echols.
John Echols

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