On April 20, the West Texas Intermediate crude benchmark did not just fall below zero, it plummeted to negative $37.63 a barrel. This stunning price crash was the result of a months-long series of unfortunate events, starting with a global decrease in oil demand spurred by the spread of COVID-19. When the leading OPEC+ countries of Saudi Arabia and Russia initiated talks to decide on a strategy to contend with the global slump in oil demand, the talks quickly developed into disagreement and then an all-out oil price war. That price war led to a massive oil glut to the tune of approximately about 10 million barrels of oversupply on the global oil market per day. While oil markets have bounced back from negative territory, oil prices remain low, and the issues that caused the crash – a global pandemic, a massive oil glut, and a severe shortage in oil storage capacity – persist. This has led to some unusual oil bartering, as reported by Reuters this week in an article that issued a warning: “Sellers beware: Price collapse triggers bartering over oil and gas deals.”
The collapse in oil prices to 21-year lows has led potential buyers of oil and gas fields to try and renegotiate deals at higher prices, with the first examples emerging of sellers having their hand forced. According to Reuters, “when most oil companies are slashing budgets, dividends, and headcounts to preserve cash, sellers are facing a difficult choice between sweetening the deal or risking losing it altogether.”
The report cites the example of Premier Oil, a UK-based independent oil company that is in a tough spot (you could even say they’re over a barrel) concerning a pending deal over assets in the North Sea. Premier is now seeking a cheaper price than the $625 million they had already agreed to pay BP for the assets. And they’re not alone. According to Reuters, “Energean is doing the same with a $700 million purchase from Edison.” Oil and gas equity analyst Al Stanton of the Royal Bank of Canada told reporters that these instances are part of a trend in which “the oil industry is revisiting its ‘before coronavirus’ (BC) bids, and we envisage announcements from other firms as they re-price or repackage previously announced deals.”
While some companies are seeking discounts on deals they had already sealed, others are walking away from them altogether. This month, French supermajor Total abandoned its purchase of Occidental Petroleum’s assets in Ghana, which hit a glitch over part of the French firm’s wider deal with U.S. Occidental. The company released a statement concerning this decision which cited “the extraordinary market environment and the lack of visibility that the group faces.”
Many deals that remain on the table are in danger of falling through in the near future, but there have also been a number of successful renegotiations. “Privately held Hilcorp Energy and private-equity firm HitecVision have successfully renegotiated deals with energy majors BP and Total, respectively, during the current oil price meltdown,” reports Reuters, before quoting an industry banker that says, “sellers, especially the majors, have certainly been very constructive.”
While it’s not all bad news for oil deals, the outlook remains pretty bleak for the near future. Even as markets begin to bounce back, it’s a long, volatile road ahead as we head into what will likely be a years-long recession. As many oil companies have already declared bankruptcy or shut-in large numbers of wells, we’re looking at a long road to recovery. That being said, there are a lot of industry hopefuls that say that the decreased number of oil companies and active wells hold promise for high oil prices when demand returns.