The worst of the pandemic’s impacts on public health may have passed, but its long shadow still hangs over the economy and the energy industry in the form of supply chain bottlenecks, labor shortages and steep inflation. Setbacks such as manufacturing disruptions in Asia and congestion at U.S. ports infuse indefinite uncertainty, energy company executives and analysts say.

supply

“Supply chain snarls are likely to persist well into 2022,” said CoBank’s Dan Kowalski, vice president of the Denver-based energy lender’s Knowledge Exchange division.

Manufacturers and retailers in the United States, as well as in countries across Europe, he noted, are open and hungry for components and products. However, lingering coronavirus-related restrictions in Asia continue to cripple suppliers there, curbing their ability to meet demand in Western economies

Meanwhile, labor shortages and rising payroll costs in the United States – vestiges of pandemic shakeups to the workforce – are crimping U.S. ports’ ability to process deliveries and secure truckers to transport them.

The U.S. Commerce Department said Thursday the American economy expanded at a modest 2% annual rate in the third quarter, marking a substantial slowdown from gross domestic product growth of 6.3% in the first quarter and 6.7% in the second quarter. The government said consumer spending rose at an annual rate of 1.6% in the third quarter, a considerable pullback from the 12% increase in 2Q2021, largely because Americans cannot find the products they want to buy. 

Creighton University economist Ernie Goss, who surveys supply managers, said results this month showed that 73% expect shortages and mounting costs through 2021. One-third expect delivery woes to represent the “greatest threat” to their firms for the next 12 months.

Energy company executives have indicated that all of this is driving up costs and making it difficult to boost output, secure equipment and deliver services in the pandemic’s wake.

‘Escalating Input, Freight and Logistics Costs’

Baker Hughes Co. CEO Lorenzo Simonelli said while the U.S. and global economies continue to recover, the pace is “hampered” by “global ship shortages, supply chain issues and energy supply constraints in multiple parts of the world.”

For the natural gas and liquefied natural gas (LNG) markets, Simonelli told investors on the company’s recent third quarter earnings call that “a combination of solid demand growth and extremely tight supply in many parts of the world” have supported prices, a favorable development for producers, but a contributor to global inflation. He painted a similar picture for world oil markets.

For Baker, he said the company’s Digital Solutions business faced “multiple challenges during the quarter” related to “electrical component shortages, largely around semiconductors.” That lowered revenue and hurt margins in the third quarter.

“We recognize that we have work to do in Digital Solutions to drive operating margins back to an acceptable level,” Simonelli said.  

CFO Brian Worrell said the company’s oilfield services results “were below our expectations” in part because of hurricane-related disruptions in the Gulf of Mexico but also because supply chain issues “impacted both revenues and margins. Our Chemicals business was the most heavily affected from these issues, with some pricing increases offset by escalating input, freight and logistics costs.”

Chart Industries Inc., which engineers and manufactures equipment, including systems to liquefy hydrocarbons, hydrogen and helium, said a combination of labor and logistics challenges cut into its margins during 3Q2021.

“We responded quickly with surcharges, additional price increases and operational cost reductions,” said CEO Jill Evanko on an October earnings call. “Yet, none of our actions were immediately impactful to margins within the quarter itself.”

Liberty Oilfield Services Inc., meanwhile, said it benefited from service price increases during the third quarter. However, CEO Chris Wright said on a recent earnings call, the company “was not immune to the serious supply chain issues the world faces today as faster cost increases more than offset higher prices during the period.”

Liberty, which provides fracturing services, said increased transportation costs and driver shortages, along with maintenance personnel and supply constraints, hurt its margins in the quarter.

For instance, Wright said, “we estimate that rapidly increasing logistics costs that were not passed through to customers in the quarter were approximately $12 million, and maintenance costs were $8 million higher than normal due to integration and Covid related disruptions. While we expect the supply chain, logistics and integration challenges to continue into the fourth quarter, we are actively working to moderate their effect on margins.”

How Long Will Challenges Fester? 

To be sure, some energy companies with global reach and vast resources said they have been able to navigate the pandemic’s effects on supplies and remain relatively unscathed.

Schlumberger Ltd., for example, said it experienced some supply chain and logistics issues in the third quarter. However, CFO Stephane Biguet told investors during the recent earnings call, “We are successfully engaging with our suppliers and customers to jointly navigate inflationary trends. We are collaborating with our customers to optimize planning and, where applicable, make the necessary adjustments through existing contractual clauses on negotiation. As a result, so far, we have largely been able to shield ourselves from the inflation effect as the growth cycle accelerates.”

Biguet echoed Halliburton Co. executives, who also noted an ability to draw upon global scale to manage through labor shortages.

“The labor market is tight today,” Halliburton CEO Jeff Miller said during an earnings call earlier in October. “Over the last few years, we compressed our onboarding time, strengthened our national recruiting network and used digital solutions to significantly reduce our field personnel requirements.”

There are “real challenges,” said the CEO. However, “we have the scale, speed and systems to recruit talent nationally and quickly deploy it for our customers.” In addition, “we have ready access to a fleet of drivers to make deliveries to the job site.”

That noted, executives said the broader supply and inflationary pressures were exceptional and could weigh on the global economy and energy companies well into next year. Miller said North America exploration and production companies may need to increase their capital spending by 20% in 2022 to lock up equipment and labor in an ever tightening global market.

In the meantime, Rystad Energy analysts said energy companies would need to pass along higher costs to customers and, by extension, consumers. Natural gas prices have doubled this year and crude futures have advanced more than 60%.

The U.S. Energy Information Administration projected that U.S. home heating costs this coming winter – among the half of the country that uses gas to power furnaces – could spike 30% from last winter. Gasoline derived from oil, meanwhile, is already up more than 50% from a year earlier.

“The volatile supply chain and energy landscape at present doesn’t rule out” further price surges, Rystad analyst Louise Dickson said. This, she said, could ultimately dampen demand for oil and gas, eventually dragging down prices and creating a “lag effect” on energy companies’ revenue.