Companies across oil & gas and chemicals sectors are facing significant challenges due to rapidly evolving global trade policies. Tariffs — essentially taxes on imports — are contributing to both uncertainty and increased costs within the supply chain. To effectively manage these changes in today’s volatile economic landscape, companies must adopt a cross-functional approach that integrates input from commercial, legal, supply chain and tax teams.

The long-term implications of these tariffs necessitate immediate attention from companies across the oil & gas and chemicals value chain, as they will likely persist for the foreseeable future. Companies taking a wait-and-see approach should consider the historical precedent, as the Biden administration largely retained the tariff framework established during the first Trump administration.

To navigate these complexities, companies should stay informed and consider the following:
1. Analyze supply chains: Companies should analyze their product portfolios and their data in the US Customs and Border Protection’s Automated Commercial Environment (ACE) system to identify vulnerabilities and assess the potential impact on their supply chains. This involves not only mapping the impact of tariffs on their product portfolio but also understanding the indirect materials required for production. For example, while crude imports may be exempt from recent tariffs, materials like steel and aluminum (and certain “derivative” products) that are necessary for refining equipment currently carry incremental tariff rates as high as 50% when imported into the US. Similarly, in the chemical sector, polymers and other large-volume chemicals were exempt but other raw materials could impact the supply chain costs for those companies.

2. Develop trade impact strategy: After mapping their financial and physical flows and quantifying the magnitude of potentially affected imports and exports, companies can develop scenario analyses to manage or reduce the potential impact of trade policy changes. Evaluation of domestic or alternative sourcing options and country-of-origin planning are two examples of commonly applied strategies.

3. Consider valuation planning: Given the long time horizons in altering physical supply chains, companies can focus on customs value planning to reduce the impact of tariffs. This approach may allow for changes that are less disruptive, as it does not require altering the origin and nature of imports. Multinational oil and gas companies that have significant intercompany transactions can review their transfer pricing policies to determine whether the declared import value can be lawfully reduced. While planning opportunities such as bifurcating product versus non-product costs and making operating model changes can potentially offset the increase in tariffs, adjustments to transfer prices may have broader impacts on a company’s corporate income taxes. Hence, valuation planning and analyses should not be performed in a vacuum. Strong cross-functional communication and planning are essential for effective implementation.

4. Understand contractual obligations: A thorough understanding of contractual obligations is vital. Companies must determine whether suppliers are responsible for paying duties, if they can pass these costs onto buyers or if they can collaborate to share the burden. This contractual clarity can guide decision-making during turbulent times.

5. Develop an export strategy: The potential for country-specific tariffs requires strategic export decisions to manage costs. Additionally, the exclusion or limitation of certain tariffs from drawback eligibility in earlier executive orders underscores the complexities companies face in navigating international trade and seeking refunds on imports.

6. Monitor geopolitical and legal changes: The geopolitical and legal landscape can shift rapidly, affecting trade relationships and the imposition of tariffs. Companies must remain vigilant about which countries may be targeted by the administration and be prepared with contingency plans. This monitoring will require constant attention and adjustments as necessary.

7. Communicate impacts: Companies should maintain open communications with their political representatives to share concerns and impacts related to trade policies. It is also critical that business stakeholders — such as shareholders or customers — gain an understanding of how companies are proactively addressing any potential impacts of trade policies.
To thrive in the current landscape, companies need to be agile and ready to act quickly. By proactively addressing these challenges, the oil & gas and chemicals sectors can position themselves for success in an uncertain economic environment.

Summary
Companies in the oil & gas and chemicals sectors are grappling with challenges from evolving global trade policies and tariffs, which increase costs and uncertainty in the supply chain. To effectively manage these changes, a cross-functional approach involving commercial, legal, supply chain and tax teams is essential. By staying informed and agile, these companies can proactively address challenges in a volatile economic landscape rather than adopting a wait-and-see approach.

Source: EY