21st Century Strategies for Oil and Gas Companies

June 19, 2017

For many years, firms in the oil and gas industry enjoyed great returns on their investments. But in 2014, the trend changed as the world was hit with an unprecedented decline in oil prices. This made many companies in the industry go bust. As a result of this decline, there is need for the main industry players, including oilfield services and equipment companies, to adjust to the changing environment and put in place strategies that can help them stay afloat- even when they market is slow.

Learning from the Past

Before we delve into the strategies, it is important to review the history of the oil industry since the 1980s.  Note that trouble in the oil industry started after the 1986 collapse. Oil prices remained volatile through the 1990s, and declined further in 1998 after countries such as Norway, Venezuela and Iran increased their output to meet the world’s demand for oil. Prices dipped, and as a result, many oil companies were forced to merge. This reduced the aggregate spending and slowed production. It set the stage for price increases starting after 2002. Prices continued to rise and hit a peak of $139.05 per barrel in June 2008. In 2014, oil prices started a gradual decline, eventually bottoming at $27.67 per barrel in 2016. As a result, oilfield services and equipment companies were put under pressure to adopt strategies that would mitigate the effects of price decline. The strategies the firms are adopting include those below.

Cutting Costs

To address falling revenue, oil industry players are determined to bring down the break-even point. One strategy is to target the cost of extracting a barrel of oil. This cost has doubled in the last six years. In 2010, it was $8 a barrel, but rose to about $17 in 2016. The cost varies across different shale fields, but there are fears that if the trend is not halted, declining prices may force producers to shut down drilling operations. At the moment, producers continue to pump from existing wells; they are reluctant to authorize production from new wells. To remain in business, oil companies are securing price cuts from service providers and adopting new and efficient recovery methods.

Additional components that are targeted to help bring down the cost of producing fuel are in rail and pipeline- the midstream. For example, Colorado was able to save about $7 per barrel.  This has forced other states to improve midstream components to slim down the cost of their oil.

Vertical Integration

Creating a one-stop shop can significantly lower costs and simplify management. Another strategy for oilfield service companies and equipment providers is to offer a combination of value-added services to enhance their product offerings. Rather than supplying equipment alone, they are also offering software and engineering training to help increase value to their clients. These are critical services that enable operators to plan the wells, model the field, complete the design and have a clear picture of the potential of gas and oil in a reservoir. Also, oilfield services companies are merging, which enhances the scope of services they offer. For instance, in 2013 Schlumberger merged with Cameron to form the OneSubsea Alliance, whose objective is to offer reservoir to surface services and create drilling and production systems.

In May 2016, Technip merged with FMC Technology to redefine the design, maintenance and delivery of subsea fields. The merger allowed the company to offer a complete suite of subsea equipment, which save $200 million in 2018 and $400 million in 2019. The savings will result from from organizational efficiencies, real estate and infrastructure optimization and supply-chain efficiencies.

Sharing Financial Risks

There are revenue models that are being adopted by oilfield services companies. They revolve around participating in project financing, in which they allow drilling and exploration companies to use their equipment in exchange for equity. In addition, they are adopting performance-based contracts when offering their equipment and services. This is critical, because it allows operators to load more capital expenses on oilfield services companies and while guarantying more stable income.

Consolidation

Oilfield services and equipment companies that offer similar services are expected to consolidate to benefit from mergers and the reduction in operating costs.

New Service Models and Equipment

Oil firms are investing in new technologies that cushion them from the hazards of today’s market through enhanced efficiency and lower cost. For instance, a service such as logging while drilling allows for generation of data during the process, and eliminates the need to pay separately for data generation. Other services, such as smart completion, rotary steerable drilling and digital technologies enhance efficiencies and are sought after by upstream operators. Nowadays, most oilfield services and equipment companies are redesigning their equipment to drive out inefficiencies. The new equipment is designed with total cost of ownership in mind, and results in 15 to 30 percent savings. Lastly, there is need to invest in automatic drilling to reduce the number of people required and cut down on costs.

Conclusion

In conclusion, it is important to point out that the 21 century is characterized by intense competition, which has forced key players to adopt distinct strategies to enable them to survive. The dominant national oil companies (NOCs) are busy building their reserves while working hard to develop their upstream capabilities. The small players (independent operators) are becoming more flexible than multinationals to rip more from the volatile markets. Also, we are experiencing situations in which IOCs (international oil companies) are decentralizing, and instead focusing their efforts on core upstream activities. They are selling downstream assets and investing the revenues generated into production and exploration activities. This confirms that players in the industry are prepared to adopt strategies that will help them stay afloat. One thing is for sure: the strategies that oilfield services and equipment companies use today will help shape the future of this cyclical industry.

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