In the aftermath of the advent of shale gas and shale oil, the upstream oil and gas sector has witnessed developments such as hydraulic fracturing and horizontal drilling. As of December 2018, 70% of the United States’ dry natural gas came from shale gas and 60% of U.S. crude oil is produced from tight plays. U.S. oil production doubled in the decade between 2008 and 2018, while its share in global oil production increased from 8% to 16%.
This unexpected increase in crude oil production from the U.S. occurred in parallel with a record pace of production from the Middle East and Russia. As a result, market became oversupplied and crude oil prices dropped sharply in 2014. Post this price drop, there was a decline in upstream oil and gas investment, projects were delayed and oil companies reported poor financial results. The offshore oil and gas sector was the most negatively impacted.
Changes in Market Share Matrix
A consequence of the decline in oil and gas projects was intensified competition between existing oilfield equipment and services (OFS) providers. Leading OFS providers started offering their services at a lower price and several small players started to file for bankruptcy. In 2017 and 2018, integrated service providers turned their focus to mergers and acquisitions to grow market share, acquiring new technologies and capturing project efficiency through vertical integration. Some small and mid-size companies are focusing on niche markets or a small set of technologies. These players are offering specialist products and services with some differentiation, allowing them to compete with integrated service providers.
Adoption of Analytics
To survive low crude oil prices, oil and gas operators turned their focus on financial discipline, cost-control measures and employee reduction to navigate through a difficult environment. Furthermore, several major oil and gas operators started to adopt big data to reduce drilling time and maximize per well recovery. ConocoPhillips, for example, achieved a 50% reduction in drilling time in its Eagle Ford assets with the help of the Integrated Data Warehouse (IDW) and analytics approach. In the Permian basin, the break-even price dropped from around $100 per barrel to around $40 per barrel between 2013 and 2016.
A study found that adopting digital technologies and data analytics for asset management and operation in the UK Continental Shelf (UKCS) could increase production and lower maintenance costs worth £1.5 billion ($1.92 billion). In March 2019, the UK Oil and Gas Authority launched the UK Oil and Gas National Data Repository (NDR), which is home to 130 terabytes of data. The NDR aims to achieve the economic recovery of 20 billion barrels of oil and gas remains, unlock new investment and technology, and conduct more exploration activities.
Oversupply in the OSV Market
Offshore oil and gas projects are capital-intensive and a significant aftermath of the global drop in crude oil prices was a decline in new offshore oil and gas projects. This negatively impacted the utilization and day rates of Offshore Support Vessels (OSVs). Though the OSV market has witnessed gradual recovery in 2019, the market is still oversupplied, with around 1,000 OSVs stacked worldwide. Half of these stacked OSVs have been out of service for at least three years and around 400 of them are more than 15 years old. Reactivating these old vessels is time-consuming and can cost about $1.4 million per vessel.
Currently, OSVs are running at close to their operating expense, leaving very small margins for profit. Some advanced operators are using data and technology to achieve efficiencies on both, operating expenses as well as on Selling, General and Administrative (SG&A) expenses. For example, some OSVs are automating vessel operations, reducing the level of crew required to man the vessel and thus, saving on crew costs. Consolidation is another option that operators are looking at to stand out on commercial strength and cost competitiveness. The merger between Tidewater and GulfMark is a good example of consolidation driving cost synergies in the form of targeted SG&A cost reductions.
The after-effects of the shale revolution have driven the oil and gas industry to make fundamental changes in the way they operate, adopt new technologies and increase collaboration. Offshore oil and gas projects are capital-intensive, high-risk propositions with longer payback periods. With shale being a less cost-intensive option with shorter payback periods, the pressure on the offshore oil and gas sector to be cost-competitive and adopt new technologies to reduce OPEX and CAPEX. However, the widespread adoption of technology would require an intense awareness program. Companies that are focused on niche products and services need to be the best in the market for their offerings as they may lose market share easily.