Over the past 24 months, companies in the oil and gas supply chain have gone from boom to bust.
Operators faced with crumbling crude prices have cut back sharply on supply-chain spending. The upstream oil and gas industry has to think of new ways to do business.
As a result, oil-field service and equipment (OFSE) companies are seeing business evaporate.
Supply Chain Strategies to Consider in 2020
The cost cutting required to address falling revenues has come as a shock to an industry that over the years had grown fat and happy on high prices.
The good times resulted in multiple years of cost inflation. With expenditure per barrel rising between 5 and 15 percent each year since 2009, depending on the service and the geography.
Offshore fields in particular saw costs rise significantly, resulting in high break-even levels.
In the North Sea, for example, the cost of extracting a barrel of oil equivalent more than doubled. This is from just over $8 a barrel in 2010 to around $17 a barrel just three years later.
Vertical integration in Oil Supply Chain
Collaboration is a particularly effective way to lower costs and simplify contractor management.
Combining equipment, software and engineering, or other combinations of service offerings can unlock significant value for customers.
Multiple OFSE companies are now bringing these services in-house. This integrated offerings is helping reduce coordination costs.
This can lead to savings of up to 30 percent.
Oil Supply Chain New Revenue Models
New revenue models have emerged across the OFSE sector, including performance-based contracts that combine equipment and services.
In this way, OFSE companies are able to give operators more flexibility. They are doing this by reducing their cost base and need for investment in difficult times.
This loads more capital expense on the shoulders of OFSE providers, but it also can create a more stable income flow.
In conclusion, companies have cut costs and, in some cases, changed business models in response to the covid-19 crisis and the economic downturn.
However, in pursuit of sustainable cost reductions and near- and long-term profitability, both operators and OFSE companies have begun to work together.
Right now, OFSE companies in particular are exploring the above three strategies to accommodate this changed environment: cost cutting, vertical integration and new revenue models.