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Hazloc Heaters
Copper Tip Energy
Hazloc Heaters

Oilfield Services Sector Must Seek Other Ways To Weather Difficult Market to Survive

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These translations are done via Google Translate

Dan Eberhart
Dan Eberhart is CEO of Canary, LLC.

From Forbes – See Original Article HERE

Rarely have prospects looked so grim for the oilfield services sector.

Producers have reduced drilling activity to record low levels in response to persistent weak prices and demand destruction caused by a new wave of coronavirus cases. Service companies are looking for new survival strategies admit continued uncertainty and a shifting energy landscape.

The crisis in the oil market exasperated an already tight capital market, prompting major oil companies to cancel or defer roughly $41 billion in planned capital expenditures. The combination of plummeting prices, cratering demand, and canceled projects create an environment for service companies as unpredictable as it is devastating.

The turmoil brought on by the Covid-19 virus is forcing the industry to deploy dramatic cost-cutting measures. An analysis by Rystad Energy of the top 50 oilfield services firms shows staffing is at its lowest level in more than a decade. The number of active drilling rigs in the U.S. onshore is down 73 percent since March, and active frac crews fell 77 percent in the same period. Anticipated revenue per employee is also declining toward levels not seen since the 2015-2016 downturn.

The fact is that the oilfield services sector never fully recovered from the last downturn, as I pointed out when Weatherford International filed for bankruptcy protection last year.

The upstream oil industry’s focus on profit over growth—a trend that started well before the arrival of the pandemic this spring—has further tightened the vice-grips the services sector’s margins. Service companies continue to face pressure to have the latest and greatest equipment—drilling rigs, pressure pumpers, and other high-dollar equipment used in hydraulic fracturing operations—on hand even while their customers demand lower rates. Competition within the sector is such that many can’t take the heat and are looking for an exit.

Since the beginning of 2015 through July 31, 2020, corporate law firm Haynes and Boone has tracked the filing of 221 oilfield services bankruptcies with an aggregate debt load totaling $95 billion.

The difference this time around is that oil demand, not supply is driving the downturn. And there’s no guarantee global demand will bounce back to pre-pandemic levels—roughly 100 million barrels a day—anytime soon. While demand in China has come back stronger than expected, the rest of the world faces a potential second wave of infections that threatens to push it back into full shutdown mode. Demand won’t fully recover until there is a vaccine that remains months, if not years, away.

Some suggest 2019 may have marked “peak demand” for oil, and industry executives are openly worried the pandemic could accelerate the low-carbon energy transition in Europe and North America.

European oil companies are already shifting their business model away from petroleum in favor of low-carbon energy. BP announced it would reduce oil and gas production by 40 percent by 2030. The supermajor is shedding high-cost, high-carbon output, and ramping up investment in renewable resources and alternative energy technologies.

The quickening transition means the economic squeeze is both short- and long-term for oilfield services firms. They’re trimming the little fat left after the belt-tightening of the previous downturn, but the cuts are coming dangerously close to the bone.

Besides widespread layoffs, executives are taking pay cuts, and investment budgets are nearly nonexistent because of the continued uncertainty in the market. Shareholders are feeling the pain, too. Even the biggest players have cut dividends. Schlumberger, the world’s largest oilfield services company, slashed its dividend by 75 percent—the first time the sector giant has reduced its payout to shareholders.

The oilfield services sector faces a painful restructuring period. More bankruptcies and cost-cutting mergers are coming. The recent tie-up between KLX Energy Services and Quintana Energy Services offers an example of where the sector’s headed.

Even if demand recovers, the reduction in investment means new projects won’t come online anytime soon. Global output is expected to decline 500,000 barrels a day this year and up to 1.5 million barrels a day in 2021.

While frac crews can resume work on wells that had been previously drilled but not completed (known as DUCs in the industry) at current prices, there are almost no new drilling projects on the horizon, nor are they expected until the price of West Texas Intermediate breaks $50 a barrel.


Service companies need to consider their best survival strategy for the next two years. That means finding new ways to remain valuable to their upstream clients whose decades-old business model is rapidly changing.

The adoption of new technologies is crucial for an oil and gas sector that must adapt to changing attitudes among investors and the public as they demand more efficient, cleaner, and safer operations. But this technology cycle may differ from those of the past, which focused on increasing output. This time around, the pursuit of new technology is about reducing costs and personnel.

One of the faster-growing areas in the digital segment is remote operations. A trend brought about by necessity as the pandemic increases the risks of onsite activities.

Baker Hughes recently announced it was using remote technologies at 72 percent of its drilling operations in the second quarter—a more than 20 percent increase from 2019.

The industry is still in the early stages of adopting digital technologies, with plenty of room to move beyond drilling and toward broader well construction and completion-related activities.

Schlumberger’s digital segment saw the greatest margin expansion in the last quarter, and the company aims to double the size of its digital initiatives in the medium term.

Remote operations have been the biggest enabler in allowing service companies to make large-scale cost-cutting measures, namely layoffs, they promised investors.

But digitalization and automation will only take service companies so far. They still have to prove their value proposition to customers, particularly when operators are also looking to cut costs.

Partnerships between service companies and tech firms are becoming increasingly common. Halliburton recently struck a five-year strategic agreement with Microsoft and Accenture to expand remote operations and accelerate the deployment of new technology.

Schlumberger, meanwhile, is working with Exxon Mobil to deploy digital drilling solutions in the Permian Basin. A move designed to enable the development of lower-cost wells through automation and digital planning.

Hit by the Covid-19 downturn, the oilfield services market is not likely to return to 2019-activity levels before 2023. However, suppliers could diversify some oil and gas capabilities and replace up to 40 percent of their revenue by servicing the renewable markets, according to a recent assessment by the energy consultancy Rystad.

That may prove a rocky transition for those companies focused on the physical drilling and production portion of the service field—it won’t be easy to translate fracing and tubular goods to the renewables and electricity sector. But contractors providing engineering, procurement, construction and installation (EPCI) services–which earned around $55 billion in 2019 from the oil and gas industry–will find the transition easier.

Energy transition projects, such as clean energy infrastructure construction and renewable energy development services, offer major opportunities for the ollfield services sector. Still, companies will have to be nimble and take advantage of the shifting market early.

That doesn’t mean the end of shale projects, either. While the sector is licking its wounds now, shale oil remains a crucial short-cycle producer capable of helping balance global oil markets.

When prices rise into the $55 to $60 a barrel range, shale activity will pick up once again. The current crisis is more of a threat to projects with longer development windows, deepwater and heavy oil projects.

But until prices recover sufficiently to spur new onshore drilling, the services sector will need to continue to trim costs and find operating efficiencies. Not just for the next two years, but possibly for the next decade.

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