Oil companies forced to renegotiate deals or risk losing everything


On April 20, the West Texas Intermediate crude oil benchmark did not just fall below zero, it fell to negative $ 37.63 per barrel. This astonishing price crash was the result of a series of unfortunate events spanning several months, starting with a worldwide drop in demand for oil spurred by the spread of COVID-19. When the main OPEC + countries, Saudi Arabia and Russia, began talks to decide on a strategy to deal with the global collapse in oil demand, the talks quickly turned into disagreement , then into a total oil price war. This price war has resulted in a massive oil glut of around 10 million barrels of excess supply per day on the world oil market. As oil markets rebound into negative territory, oil prices remain low and the problems that caused the crash – a global pandemic, a massive oil glut and a severe shortage of oil storage capacity – persist. This has led to unusual oil exchanges, as Reuters reported this week in an article that issued a warning: ” Sellers are wary: collapsing prices trigger barter on oil and gas transactions. ”

The collapse of oil prices to 21-year lows has led potential oil and gas field buyers to try to renegotiate deals at higher prices, with early examples of sellers being forced to do so. According to Reuters, “when most oil companies cut their budgets, dividends and staff to save cash, sellers face a difficult choice between softening the deal or risking losing it. “

The report cites the example of Premier Oil, an independent oil company based in the UK which is in a difficult situation (one could even say that it is above the barrel) concerning an ongoing agreement on assets in North Sea. Premier is now looking for a price cheaper than the $ 625 million it had already agreed to pay BP for the assets. And they are not alone. According to Reuters, “Energean is doing the same with a $ 700 million purchase from Edison. Oil and gas analyst Al Stanton of the Royal Bank of Canada told reporters that these cases are part of a trend in which “the oil industry is re-examining its offerings” before the coronavirus “(BC .), and we’re considering ads from other companies as they recalculate or repackage previously advertised offers.

While some companies are looking for discounts on offers they have already made, others are moving away from them entirely. This month, French super-major Total abandoned its purchase of Western Petroleum assets in Ghana, which shattered part of the French company’s broader deal with the US West. The company released a press release regarding the decision, which cited “the extraordinary market environment and the lack of visibility the group faces”.

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Many agreements that remain on the table may not be concluded in the near future, but there have also been a number of successful renegotiations. “The private company Hilcorp Energy and the private equity firm HitecVision successfully renegotiated the agreements with the energy majors BP and Total, respectively, during the current collapse in the price of oil,” reports Reuters, before quote an industry banker who said, “The sellers, especially the majors, have certainly been very constructive. “

While this is not all bad news for oil deals, the outlook remains bleak for the foreseeable future. Even as markets begin to rebound, the road ahead is long and volatile as we head into what will likely be a multi-year recession. As many oil companies have already declared bankruptcy or closed a large number of wells, we are considering a long road to recovery. That said, there are many hopes from the industry that the decline in the number of oil companies and active wells holds promise for high oil prices when demand returns.

By Haley Zaremba for Oilprice.com

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