INTRODUCTION

In the last two years, companies in the oil and gas supply chain have gone from boom to bust. Here are five ways that oil-field service and equipment businesses are experimenting with in order to adapt to the changing climate. Companies in the oil and gas supply chain have gone from boom to collapse in the last 24 months. In response to falling oil prices, operators have drastically reduced supply-chain investment. As a result, oil-field service and equipment (OFSE) firms are seeing their business dwindle. In response, they have slashed expenses and, in some circumstances, changed business strategies. However, in order to achieve long-term profitability and consistent cost savings, both operators and OFSE firms have begun to collaborate. OFSE firms, in particular, are now investigating five methods to adapt to this changing environment: cost-cutting, vertical integration, new revenue models, consolidation, and new equipment and service models.

1. A diet for the overweight to save money

The cost-cutting necessary to handle decreasing revenues has come as a surprise to an industry that has grown fat and comfortable on high pricing over the years. The good times have resulted in years of cost inflation, with expenditure per barrel increasing by 5 to 15% each year since 2009, depending on the service and region. Offshore fields, in particular, witnessed considerable cost increases, resulting in high break-even levels. In the North Sea, for example, the cost of extracting a barrel of oil equivalent more than quadrupled in three years, rising from little over $8 a barrel in 2010 to over $17 a barrel in 2015. On the positive side, all that fat provides several possibilities to trim down and save money. Operators are regaining the efficiency spirit. Independent operators in the US onshore, for example, have been able to increase production per well while lowering cost per barrel by using improved horizontal drilling techniques, longer wells with more frac stages, and super fracking, in which drillers pump significantly more proppant (sand) into their wells. In the North Sea, too, 2015 saw a long-awaited cost reduction. According to McKinsey’s North Sea operational benchmark, lifting costs fell by 20% in 2015. Initially, operators concentrated on tactical efforts such as project delays, cost savings, and personnel reductions, while OFSE businesses responded by reducing their own service and manufacturing footprint to cope with reduced activity, lowering their costs for solutions supplied by 20 to 30 percent. However, as operators take more strategic actions, such as streamlining operations, investigating supply-chain alliances, developing new business models, and implementing new technology, OFSE players are following suit.

2. Vertical integration: All-in-one solution

Collaboration is a particularly efficient method of reducing expenses and streamlining contractor management. Combining equipment, software, and engineering, or other service offerings, can provide considerable value to consumers. Many services and equipment purchases are presently outsourced to a number of suppliers, resulting in complexity and a fragmented supply base. Several OFSE firms are now bringing these services in-house, with integrated offers lowering coordination costs.

This can result in savings of up to 30%. Schlumberger’s SIS subsidiary, for example, provides a software backbone based on its Petrel software platform. This enables an operator to build a perspective of the oil and gas potential in a reservoir, model the field, plan the wells, and finish the design. While businesses create integrated offerings in-house, many often collaborate or merge with others to provide a broader range of services.

3. Consolidation: Increasing concentration

M&A activity in the OFSE industry can be defined as the consolidation of similar types of businesses (such as Nabors and C&J oil-field service activities, or Halliburton and Baker Hughes’ proposed merger, now cancelled), as well as integration along the field life cycle (such as Schlumberger’s acquisition of Cameron or FMC’s merger with Technip). McKinsey predicts that when oil prices stabilize, there will be considerably more consolidation in the OFSE industry. Many businesses now are a fraction of their former size; they might profit from cost reductions through a merger with a direct competitor.

CONCLUSION

Companies listed on the OFSE should consider if they are well-positioned to confront a turbulent and unpredictable future. To determine whether they are pursuing the appropriate tactics, they should ask themselves the following essential questions:

Do you have an operational model that can withstand industry changes?

Do you have the proper collaboration models in place with your customers and other suppliers?

Are you able to satisfy the demand for your clients to decrease costs, for example, through standardization?

Are you considering digital/data and analytics as a game-changer?