Between June 2014 and January 2016, the Brent oil price fell from an average of $113 per barrel to $31 per barrel — a 71% drop. The price collapse in 2014 triggered an industry downturn that is usually seen only once every 30 years. The oil and gas industry is heavily dependent on the oil price and any type of market contraction, especially one as significant as in 2014, leads to widespread changes within the industry.
The downturn between 2014 and 2016 led to 36% of oilfield services companies closing their doors. This included companies across the spectrum; larger and smaller companies, companies focused on one region and companies that operate across multiple regions, companies that offer a niche service and companies that offer a diversified service portfolio.
During this time, revenues contracted by 55% and job losses in some subsegments reached over 50%. This had a big impact on oilfield services companies that are dependent on service contracts from operators. A loss of revenue, resources and people greatly restricts the level of work that a service company can provide. This means that oilfield service companies need to employ strategies that protect them against a market downturn, and strategies that allow them to do more work with fewer people and assets. The Phoenix Rising: The oilfield sector transforms again report by Deloitte outlines 7 strategies identified through analyzing earnings calls of a variety of oilfield service companies.
The report groups the 7 strategies into 3 overarching categories:
Before the downturn in 2014, oilfield services companies prioritized the use of technology for outcome efficiency, and this drove capital efficiency and growth. During the downturn, and subsequent recovery, the need to lower costs to survive has taken precedence. The oilfield service sector has been a leader in the industry in terms of using innovative technologies to find, develop and produce hydrocarbons.
These technologies were focused on improving operations and facilitating growth while the oil price was high and costs were not the most important consideration. With economic survival becoming important in downturns (and moderate recoveries), technology is being used in an increasing capacity to lower costs of operations. An example of this is the use of drilling automation technology that decreases the number of people needed to complete field tasks.
An often-cited strategy that is now being implemented by oilfield services companies is to offer business process improvement services as a market differentiator, and to lower operators’ costs. Business process improvement includes lean manufacturing principles applied to oil and gas production, project management skills development, segmented or holistic process realignments, and market segment integration.
To diversify their service offerings, differentiate themselves from the market and in an effort to help customers enhance process efficiencies, some oilfield services companies are beginning to offer products and services that are designed to increase business process efficiencies for their customers. These services include acting in a consultative role and identifying areas where business processes could be made more efficient.
For example, National Oilwell Varco (NOV) has introduced services to assess and review methods to enhance operational efficiencies, such as infield certifications, rig performance assessments, and equipment storage and reactivation services.
Companies with services and products in multiple business segments are bundling these into one offering. These companies want to provide products and services across the entire upstream value chain in an attempt to lower costs for their customers. Market segment integration can reduce costs for the upstream producer because it is intended to drive business process efficiencies by collaborating with customers at the start of a project and optimizing workflow procedures through the value chain. This approach is meant to increase operational efficiencies as much as possible to cut costs.
While some companies are bundling products and services, others are acquiring, or merging with, companies that expand their offering to cover as much of the entire value chain as possible. Three of the clearest examples of this is the acquisition of Cameron International by Schlumberger, the merger between Baker Hughes and GE Oil & Gas and the merger between FMC Technology and Technip.
While some of the strategies above focused on increasing operational efficiencies to lower costs directly for the customer, this strategy focuses specifically on cutting internal costs. Lower internal costs has obvious benefits such as being able to offer lower prices to customers, increasing market share and being in a better position to survive a market contraction. Oilfield service companies are lowering costs in internal operations and service delivery through business process improvements, integration, and technology implementation.
A large number of companies within the oilfield services sector are starting to implement initiatives that improve business processes, thus cutting costs and allowing them to do more work with fewer people and resources. One of these initiatives is the digitization of manual business processes. This could be as simple as digitizing a paper form out in the field, or as complex as digitizing and automating entire business workflows, building solutions for sophisticated data management and using business intelligence platforms for more informed decision-making.
Oilfield service companies are employing some traditional business strategies to ensure competitiveness within the market. Two of these is to add new market offerings, or to expand on existing offerings. The new low-price environment has led to a number of companies expanding in the market segments where they can be most competitive. The report found that 26 companies planned to expand a market segment currently offered with complementary products and services rather than add and integrate new market segments.
An example of this is a company adding more frac trailers or drilling rigs to enable them to complete more jobs. Another way that this strategy is being implemented is through mergers with, or acquiring, companies with similar service offerings.
Securing long-term service contracts allows companies to hedge against lowering and cyclical oil prices. While some contracts do not guarantee revenue during a downturn as in 2014, the report found that many companies are pursuing this as a strategy to ensure survival in an unpredictable market. As the market is in recovery, long-term contracts give oilfield services the financial assurances they need to expand service offerings and enter different geographic markets around the world.
Offering services to market segments outside the oil and gas business can provide additional protection against full exposure to oil price cycles. The report found, though, that this is the least-cited strategy by companies at the moment. Some companies are working to offer products and services outside of the oil and gas industry, using existing resources and expertise. All the companies that cited this strategy had capabilities in place to expand an existing product or service into a new industry. For an oilfield service company to develop a new product or service for an industry outside oil and gas is costly, and brings with it a lot of risk.
Examples include companies in the offshore sector leasing and selling seismic equipment and services to the marine segment of the seismic industry. Also, companies providing geo-intelligence and asset integrity solutions, are moving into industries beyond the oil and gas sector, such as wind farms, nuclear power plants, bridges, and railways.
The unpredictability of the oil price, including the recent prolonged downturn, means that oilfield service companies need to be proactive in implementing survival and competitive strategies. All seven of the strategies discussed here have been implemented to a varying degree by most oilfield service companies in the United States.
JourneyApps has helped some of these companies realize strategic success through the implementation of business process digitization software. Learn more here about how JourneyApps helps your organization gain a strategic competitive advantage through digital transformation.