Generating value in oilfield services over the next decade
Last August I highlighted the challenges the oil, gas, and chemicals sector has had in demonstrating value to investors in a volatile and low commodity price environment. Now that we are in 2020, this is a good opportunity to take stock of the last decade and discuss opportunities for the next one. Since 2014, oil prices have fallen from $100+ per barrel highs to less than $30. In the last couple years, Brent has traded for the most part in a relatively narrow band between $60 and $70. Global natural gas prices reached nearly $20 per million Btu following the closure of Japanese nuclear plants, dropping more recently as liquefied natural gas (LNG) exports from Australia and the United States rose substantially. During this period, US Henry Hub prices mostly traded well below $4 per million Btu, and global prices have recently followed.
While it is difficult to forecast oil and gas prices, it seems safe to say that we will likely see a lot of volatility in the 2020s, with an increased dose of uncertainty stemming from the energy transition as well as consumers’ and governments’ focus on reducing carbon emissions. Though many oil and gas operators felt a direct impact from lower commodity prices, based on revenues and margins, oilfield service (OFS) companies actually bore the brunt of the downturn. Despite continued spending in US shale, and high levels of international and offshore project sanctions in 2019, OFS market capitalization across the entire spectrum has dropped and not recovered (figure 1).
Figure 1: OFS market capitalization has dropped following volatile and low commodity prices
Source: Deloitte, Down but not out: Transforming oilfield services
This decline in value has continued even after global oil and gas production, the number of wells drilled, and the amount of fluids and proppant pumped continues to rise. In fact, looking more narrowly at US shale (representing most of the global production growth in recent years), the complexity of completions has increased by almost 50% (figure 2). That means that even after providing significantly more services per well and delivering value for clients in the form of increased oil and gas production, many if not most OFS companies have not delivered value for their investors. In short, they have been doing more for less. That does not seem sustainable in either the short or long term.
Figure 2: US shale completions complexity continues to rise through the price cycle
Source: Deloitte, Down but not out: Transforming oilfield services
How can service providers continue to deliver value for their clients while generating sustainable earning for their investors? The industry should stop fighting the last war and begin focusing on the future. The operational footprints and corporate structures that worked well in 2010 to 2014 may not fit for purpose in 2020. Reshaping these companies for the 2020s is not expected to be easy. However, there are five levers that they can consider to improve performance in the coming decade: portfolio strategy, commercial approach and pricing, operating model redesign, integrated business planning, and digital solutions. Getting these right today can help prepare for the uncertain markets of tomorrow.
For more about how oilfield services companies can adapt to evolving energy markets, see Deloitte’s recent report Down but not out: Transforming oilfield services.
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