Oilfield services firms have taken a hit, but they can now adapt

Over the past two years, the slump in oil prices has caused a ripple effect along the entire oil and gas value chain. The world is entering a period of volatile oil prices and the oilfield services and equipment (OFSE) industry has taken a strong hit.

This is largely because a slew of major oil producers has planned, introduced and set in motion cost-cutting initiatives.

The OFSE industry is an important part of the GCC economy – with a size of about US$65 billion and almost 7 per cent of the global market. Saudi Arabia accounts for 40 per cent of the GCC’s market and is expected to grow the fastest – by about 8 per cent each year between next year and 2020.

Globally, oil companies are making significant cuts to capital expenditure: between 10 and 30 per cent of the capex budget has been cut by international oil companies (IOCs) and national oil companies (NOCs). Oil companies are renegotiating contracts with OFSE groups to meet their new targets. As part of their efforts to reduce costs and elevate efficiency, IOCs have also radically shifted their strategy from volume to value and this has had a huge impact on the bottom line of OFSE players.

In response to this, OFSE players have significantly reduced their cost base, including workforce. For example, Schlumberger has cut its workforce by 26 per cent since November 2014.

The offshore industry will be a key source of production growth – 62 per cent of new global oil production until 2020 will come from offshore, generating $65bn. Given this context, OFSE companies will have to focus on this segment of the industry.

The forces shaping the GCC’s OFSE landscape are different from those affecting the global industry. Energy players are increasingly applying oil recovery techniques designed to extract the maximum amount of oil from mature fields. OFSE companies are already familiar with this type of activity in other parts of the world and they need to bring such expertise to the GCC.

This is the largest driver of spending for GCC NOCs looking to offset production decline in mature fields. For example, Saudi Arabia’s Ghawar oilfield, the world’s largest conventional oilfield, is already in decline. The average production between 2011 and last year was 4.5 per cent lower than the average between 2006 and 2010, and 3.5 per cent lower than 2001 to 2005.

GCC countries are determined to maintain their production capacity and not lose market share. Last year, mature fields accounted for 36 per cent of oil companies’ external spending.

Gas is now becoming as vital as crude production because government gas price subsidies in several GCC countries have sparked a rise in demand. Some GCC countries such as Kuwait, Oman and UAE are actually importing gas.

An increasing amount of oil produced in the GCC is directly used domestically. Saudi Arabia uses as much as 3 million bpd of its own oil at home. Consequently, countries such as Saudi Arabia and the UAE are looking to boost gas production, so they can reduce crude consumption, expand exporting activities and diversify their economies.

Overall, in the GCC, the total spend on gas is expected to grow by 4 per cent over the next 10 years – led by Kuwait and Qatar with 19 per cent and 7 per cent, respectively.

Unconventional oil is also on governments’ agendas, driven by three main factors. First, such sources can help GCC countries meet their target. For example, by also producing heavy oil, Kuwait aims to increase its capacity to 4 million bpd by 2020. Second, it can address local needs. Last, developing the skill set needed for unconventional oil production can help NOCs stay on top of technological advancements. GCC exploration and production spending on these sources will grow by 33 per cent until next year, led by heavy oil. OFSE companies can also play a central role in training the local workforce to use these new technologies.

OFSE players must now, more than ever, monitor regional GCC trends, and adapt their operations accordingly.

Bjorn Ewers, Partner & Managing Director at BCG Middle East