Bankruptcy Begins: Will More Follow?

In what may be the first of many, US offshore drilling company Diamond Offshore has become one of the industry’s first big names to file for bankruptcy in the wake of the COVID-19 pandemic.

The company, which has several global bases, including Mexico’s Ciudad del Carmen, has been struggling with mounting debt for the last couple of years. According to CNN, Diamond Offshore reported a loss of US$375 million last year, which was double the loss of 2018. In that time, revenue fell by 12 percent. As reported by CNN, the company had long-term debts worth almost US$2 billion. According to the American news outlet, Diamond Offshore CEO Marc Edwards said that "after a careful and diligent review of our financial alternatives, [we] concluded that the best path forward for Diamond and its stakeholders is to seek Chapter 11 protection."

The news comes as little surprise to experts who have been warning of widespread bankruptcies due to global lockdowns, the flooding of the market due to a price war between Russia and Saudi Arabia and concerns around global storage limits that pushed prices negative last week. According to CNN, Diamond Offshore employs  2,500 workers. The potential for a layoff of this size – following those that have already been seen in oil and gas markets around the world – brings into focus the human side of the industry’s struggle.

Diamond Offshore is not alone.

Houston, the heart of the Western hemisphere’s oil and gas industry, is likely to see a number of other companies crumble under the weight of this historic demand rout. According Houston Public Media, business hub Greater Houston, whose partners include BP, Chevron, Shell and TC Energy, reported that 8 percent of its members could be forced into bankruptcy if lockdowns and price depression persists.

Even PEMEX, a company with the full backing of a federal government, may be facing its own tough decisions soon. The company has begun to remove workers from offshore platforms as COVID-19 restrictions are toughed during Mexico’s Phase 3 of the pandemic.

On Sunday, Reuters reported that 259 rig workers had been transported onshore to Ciudad del Carmen. Of these, 76 worked for PEMEX and the others for companies contracted by the NOC. Agencia Sien, a Ciudad del Carmen-based news platform, reported that up to 5,000 workers could be moved onshore.

The Phase 3 measures come at an unfortunate time for Mexico’s oil and gas industry, which has just reported its highest monthly production volume since September 2018. According to CNH production figures, average daily production in October 2018 was 1.744MMb/d. In March 2020, production reached 1.746MMb/d. Though Mexico must reduce its output by 100Mb/d in May and June in accordance with OPEC+ agreements, a smaller workforce could see production sink below the 100Mb/d cut required. 

PEMEX’s role in the country’s production figures may well fall in the coming years. Despite the recent MX$65 billion-worth (US$2.63 billion) tax cut that the company received, Proceso this week reported that investment into PEMEX Production & Exploration (PEP) will be reduced. According to Proceso, a letter dated April 13 notified Francisco Javier Flamenco López, the acting PEP Director General, that the company’s Corporate Finance Management had decided to reduce the budget from MX$269.86 billion (US$10.93 billion) to MX$229.36 billion (US$9.29 billion), a cut of MX$40.5 billion (US$1.64 billion). This represents a cut of 15 percent.