The far-reaching consequences of the Covid-19 pandemic leading to a weak economic outlook continue impeding the growth of the midstream segment in North America. Consequently, several oil and gas companies with midstream operations had to revisit their business strategies and capex plans for 2020 amid dwindling revenues. In the LNG sector, with buyers preference shifting more towards short-term or spot contracts, bagging long-term supply contracts has become a challenge for LNG project developers. As most upcoming LNG supply projects secure financing through firm, long-term supply agreements, this has negatively impacted project finance, resulting in final investment decision (FID) delays in several LNG projects. Further, the mounting uncertainty around the current economic scenario is also deterring prospective investors.
Downsizing overall capital expenditure (capex) has been a go-to strategy for several LNG operators. Royal Dutch Shell, for instance, has exited the Lake Charles LNG project in the US in 2020 as part of its capex reduction plans. Phillips 66 Partners has suspended additional capital spending on its Liberty Oil Pipeline project and the project has been put on hold. Withdrawing capex plans ensured that these companies had sufficient working capital to carry out significant daily operations. However, it might dent their profitability in the long run, as these unfinished projects can become more of a liability than an asset.
North American pipelines and LNG export projects are most impacted as their capex requirements are generally higher. The US has the highest number of impacted projects in the region, including projects such as Permian Global Access and Red Oak pipelines, Driftwood and Rio Grande LNG projects, among others.
In a short span, the North American midstream sector has undergone significant losses, pushing companies to take desperate measures such as reducing capex or delaying FIDs. However, these could only be short-term solutions. To be able to ensure future business sustainability midstream companies need to work on long-term strategies to tackle any such future challenge.
