The past couple of weeks have been full of news about oil industry restructuring moves. While the overarching energy news is focused on OPEC’s ability to forge a production cap deal by the end of November (which needs the support of major oil exporter Russia), the restructuring moves signal that the industry is now certain about a recovery being underway.
These deals span industry sectors from offshore support vessels to well servicing and stimulation, and now include the blockbuster service and equipment deal announced Monday between Baker Hughes and GE. The net result of these deals is a recasting of the oilfield service industry’s structure in response to shifts in how customers run their operations as they navigate the low price environment. Service companies now realize that they must permanently reduce their costs for delivering services and equipment to producers.
Producers, meanwhile, have endeavored to lower costs since before the 2014 collapse in oil prices, spurred by the explosion in well drilling and completion costs. Once $100 a barrel oil prices disappeared, the pressure to reduce costs became intense. These companies have taken the “lower for longer” era seriously and successfully lowered their own breakeven costs on oil and gas wells through improved drilling management, longer lateral well sections and increased fracturing treatments.
A study of breakeven well costs for five major onshore producing basins shows a reduction of roughly 45% on average since 2013. With breakeven costs so low, producers have been able to justify increased drilling and completion activity, despite continued low oil and gas prices. What no one knows yet is what happens to breakeven costs when the industry recovers. Assumptions are that half the current well cost savings have come from improved technology, while the other half came from lower oilfield service costs. In a recovery, service costs are bound to rise as more labor will be needed and at higher wages. The industry will also need to up its non-existent capital investment programs. In other words, doing more will drive oilfield service costs up – we just don’t know by how much or how quickly.
Anticipating having to charge customers more, service providers are striving to become leaner and more efficient, while improving proficiency in delivering value to their clients. This involves rethinking how businesses are structured and how they operate. Another way is to redesign balance sheets and eliminate debt payments. Consolidating businesses and reducing the number of competitors can also help by bringing surplus and/or idled equipment overhanging the industry — and depressing prices — under the control of fewer players.