Oil Rigs with Cloudy Skies

The last time OPEC+ announced production cuts, it was in response to the U.S. congressional decision to temporarily store oil production coming on the heels of record-breaking negative prices for oil sales across the globe.1 The market was flooded with oversupply due to worldwide lockdowns in the wake of SARS-CoV-2 virus fears. As a result of the production cuts, the industry rebounded from its oil price woes to an extent, but not without severe consequences to industry participants who saw layoffs, bankruptcies, and—in some cases—a halt to oil production.

Today we’re facing very different economic conditions, as OPEC+ announced a two million barrel per day oil production cut2 in October 2022. Brent and WTI posted their biggest weekly percentage gains since March after the reduction was announced, according to Reuters.3 No longer are we faced with mass concerns of oversupply; rather, country participants of OPEC+ are increasingly aware of the global petroleum supply crisis4 inherent in today’s world, including double-digit inflation and a looming recession.

Now that exploration and production (E&P) companies are positioned to demonstrate economic reserve recovery, we’re looking at a very different impact to the sector altogether, with industry consolidation from the post-COVID crisis and fewer smaller, independent producers, essentially making it more difficult and restrictive to extract resources. Add to that U.S. policy decisions to halt drilling permits and increase regulations, and the surviving participants in the sector—now more weighted to large independents and supermajors—may be getting the influx of capital and higher margins but continue to be challenged by higher costs and lower development opportunity. Although oil prices continue to fluctuate, they are nowhere close to uneconomic when it comes to development activities at the wellhead.

Impacts to the oil and gas industry are ever-changing across the supply chain, so understanding the implications to your minerals, value of developing those minerals, and impact to the bottom line becomes essential as you look back at revenue streams and costs related to operations. FORVIS is here to help you monitor contractual arrangements with services that can enhance your company’s asset protection and cost recovery strategies during this trying time. For more information, reach out to a professional at FORVIS or use the Contact Us form below.

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