Oil and Gas industry analysts have been struggling for some time to accurately forecast how the oil price will move throughout 2017, with many predictions varying widely.
There was a general consensus that the oil price is to remain range-bound in the modest $50s. However, it is also expected that market conditions will remain challenging and recent oil price volatility highlights this, with demand for oilfield services (OFS) companies’ services continuing to be uncertain in many parts of the world.
This means well-capitalised producers will continue to invest in low-cost production and maintaining existing production, with more expensive, capital-intensive greenfield offshore developments slower to recover. It also means pressure will be maintained on OFS companies to develop more efficient approaches and services to support customers and deliver cost savings. As the dust starts to settle following the ramifications of the severe industry downturn, the OFS sector is faced with the need to foster new strategies to compete, embracing data lead technology, particularly given the oil price is not expected to increase significantly in the near-term.
As part of this approach, OFS companies have been consolidating and forming strategic alliances as a tactic to enable stability and growth. Changes sought include structural, technological and strategic alliances to allow for economies of scale and lower service costs, and to ensure new developments and projects can deliver robust cash flows.
Industry experts and analysts for the North Sea and beyond are largely in agreement that alliances are key to reducing costs and maximising value. Indeed, a number of high-profile OFS companies have been trying to improve their flexibility and operational repertoire through technical improvements and last year saw a number of strategic alliances forged.
Aker Solutions’ acquisition of oil services company Reinertsen is one such example. Other mergers include Schlumberger with Cameron International, Technip with FMC Technologies and GE Oil & Gas with Baker Hughes. Each illustrates the industry’s focus on consolidation and that even large OFS companies are looking to build strategies designed to cope with a weak oil price.
In its review of the OFS sector, EY described consolidation as “inevitable” and stated that companies need to act now or be left behind. It also expects a gradual improvement for the OFS sector in 2017, strengthening into the second half of the year.
Despite a challenging few years, Aberdeen is still regarded as the centre of excellence within the OFS supply chain for the North Sea, with world-leading capabilities in areas including subsea services and technology. Indeed, there is evidence of green shoots of recovery emerging, with some reports recently that Aberdeen’s economy was showing signs of cautious optimism. This coupled with the outlook for oil prices and large sector deals could restore some momentum to the region. With consolidations and strategic alliances helping to accelerate the rate of technological innovation in the sector, as well as cost savings, these partnerships will contribute to this renewed sense of optimism.
While the OFS industry suffered through the downturn, there is a general consensus growing that the worst may be over. Times have been tough, there is no doubt, but the silver lining is that it has led to improvements in efficiencies, a better culture of working together to achieve success in some cases, and a more innovative examination of how to do business. The challenge now is harnessing that optimism and maintaining the momentum these new alliances and consolidations have created.
Scott McClurg is head of energy and sustainability with HSBC Corporate Banking.