Over the past decade, the North American oil and gas industry has seen many dramatic changes. The most dramatic change has been an increase in production from unconventionals leading to a large supply of oil, natural gas, and NGLs. However, unconventional production is more dependent on the larger supply chain leading to significant investment across the North American oil and gas value chain.
Against this background, the drop in oil prices has hurt the industry more broadly and deeply. Oil and gas operators have responded to lower oil prices in multiple ways such as cancelling projects, divesting assets, prioritizing portfolios, and, in particular, by trying to squeeze out costs across the supply chain.
For example, operators have demanded oilfield equipment and service vendors to provide discounts, cut rental rates, and deliver value-added offerings that, for example, combine new equipment sales with services. Collectively, costs have fallen significantly ranging from 15% to 30% across the industry with most cost reductions coming in onshore oil and gas and relatively smaller reductions in offshore oil and gas. An example of shrinking costs for oil and gas producers is the reduction in the price to rent coil tubing rigs for well completions. The price of renting a coil tubing rig has reduced from peak rates of $80,000 to $90,000 per day down to below $10,000 per day.
Additionally, operators are looking at ways to reduce the overall amount of equipment and time used to complete a well. Some of these ideas include replacing traditional rigs with fit-for-purpose equipment with limited capabilities, and the use of innovations such as dissolvable frac plugs to eliminate the cost and time incurred in drilling out plugs.
Collectively, these trends are driving industry consolidation. Over the past year few years there have been several large mergers and acquisitions in the oil and gas industry. Several different types of companies have recently consolidated. Two major operators, Shell and BG, have merged. Larger operators tend to procure services from larger companies which has led to consolidation among oilfield service companies. These mergers and acquisitions are driven by three key trends.
First, growing bundling of products and services. Companies like Dresser-Rand and GE are bundling compressors with engines and gas turbines and other high-value products and services. This helps operators choose an OEM who can also provide services in addition to equipment.
Second, there is an emphasis on services to supplement as well as bundle or complement OEM sales. Many OEMs are willing to cut prices on equipment if an operator will also purchase higher-margin services with it. This helps operators cut down on large capital expenses associated with equipment purchases as well as push the responsibility of maintaining the equipment to the OEM which is a less risky option.
Lastly, operators are delegating many equipment specifications and procurement to EPCs. This reduces costs for operators by outsourcing engineering to the EPC contractor instead of having more in-house engineering. Operators are also increasingly paying EPCs on a lump-sum basis. This leads to EPCs more aggressive negotiation between EPCs and OEMs as well as being almost completely focused on cost for equipment that is not mission-critical. Qualification hurdles for OEMs have also become tougher as EPCs are requiring additional paperwork on equipment performance and narrower ranges for equipment specifications in order to reduce the risk that a piece of equipment may not be well-suited for a particular function. Both of these put additional pressure and qualification hurdles on OEMs to build stronger relationships with EPCs.
OEMs and oilfield service companies are facing a lot of pressure from both EPCs and operating companies and need to develop stronger and more effective strategies to remain competitive. ADI Analytics has supported several OEMs, EPCs, and oilfield service companies develop new or refine existing strategies to improve overall competitiveness. Please contact us to learn more about how we can support your needs and agenda.
– Brandon Johnson, Tyler Wilson, and Uday Turaga
