April 23, 2020 [Daily Commercial News – Published April 22, 2020] – The spread of the coronavirus will have a strong negative effect on global construction in 2020.
As a result of COVID-19, many companies in various industries have revised their planned capital expenditures for the rest of the year. The revisions have been caused by decreases in product demand (due to global quarantine measures), lower commodity prices and, also significant, uncertainties around supply logistics and the availability of materials and financing.
Oil and Gas Companies
Oil and gas companies have been among the first to cut investments, plus capital and operating expenditures, as demand for oil, and its price, have plummeted. The temporary inability of OPEC-plus countries to reach an agreement for a coordinated decrease of oil production in March resulted in oil prices falling to their lowest level in decades. However, an historic agreement to cut production by almost 10 million barrels per day in May and June and by about eight million barrels per day for the rest of the year was reached by OPEC-plus on April 12. This agreement somewhat released the downward pressure on the price of the commodity.
The total amount of cuts in capital investment announced by the six largest global oil companies — Saudi Aramco, ExxonMobil, Royal Dutch Shell, Chevron, Total and British Petroleum — is about $34 billion. The largest among them is a capex cut of $10 billion (down 30 per cent from originally planned 2020 capital spending of $33 billion) announced by ExxonMobil.
On April 7, Daren Woods, the chairman and CEO of ExxonMobil stated: “After a thorough evaluation of the impacts of the pandemic and market conditions, we have worked closely with business partners to plan and execute capital adjustments that preserve long-term value, maximize cost efficiency, and put us in the strongest position when market conditions improve.”
The biggest part of the decrease in capital investment announced by the company relates to activities in the Permian Basin, impacting drilling and well completions. The company has also decided to defer work associated with the development of deep-water discoveries in offshore Guyana, as well as investments in the Rovuma liquefied natural gas project in Mozambique.
Other oil and gas players have also announced significant capex cuts. In the case of British Petroleum, the company’s management has said that new capital spending for 2020 is expected to be around $12 billion, representing an approximate 25 per cent decrease from an earlier announced budget figure. According to the company, the decrease in expenditures has been allocated in the following way: “around $1 billion in spending on short-cycle onshore activity,…as well as deferral of certain exploration and appraisal activity… In downstream, we expect a reduction in spend of around $1 billion, which includes reduced spending across our fuels marketing, refining and petrochemicals businesses.”
For companies in the construction business, the changes are less obvious, though also significant. COVID-19 is delaying the commissioning of projects in the pipeline. The impact is difficult to assess as the timing of construction planning suspensions is impossible to predict.
On March 18, STRABAG, the largest construction company in Austria, announced that it had stopped building activity in Austria. The halt covered around 1,000 sites in the country. The company also stated that it was not possible to estimate, with any level of certainty, the likelihood of project suspensions being undertaken by the group in other countries.
On March 23, French VINCI, a global designer, builder and operator of infrastructure projects, with a presence in approximately 120 countries, announced that due to COVID-19, many constructions projects in France have been put on hold. However, internationally the situation has been different. A company press release states that “It has been possible to maintain business activity in many countries, in compliance with health measures in force. That is particularly the case in Southeast Asia, Oceania, the Middle East, Africa and Latin America, along with certain European countries and U.S. states.”
At this point, no one can, with certainty, estimate the scale or length of the COVID-19 crisis and its impact on the oil and gas and construction industries. It is also impossible to forecast the financial implications of the economic slowdown. Some sectors and players are impacted by the virus more than others. The same holds true for countries. However, massive fiscal and monetary support, provided by governments around the world to lift suffering economies, combined with social distancing measures, will eventually result in the full recovery of the global construction industry. Hopefully sooner, rather than later.
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