In addition to a lack of oil and gas jobs and a reduction in the engineering specialist workforce, a consequence of the oil price downturn has been the impact on service companies and the lack of oil and gas projects that have been sent their way. This means that we have seen a lot of M&A activity, along with some big companies going bust. This latest downturn has seen some big changes to the supply chain:
- Amec Foster Wheeler becoming part of Wood Group
- GE acquiring BakerHughes
- Expro entering bankruptcy protection
- FMC and Technip merger
This means there are fewer companies to pick from when trying to put holes in the ground or design and build facilities. With less competition in the supply chain, this is going to spell an increase in oil and gas project costs when the industry starts hitting the FID buttons again. Good news for some, but bad news for oil companies trying to make the books balance at $60 a barrel.
We could point the finger at oil companies, who chose to delay or cancel projects instead of thinking about the long term impacts of a reduced supply chain, but they sometimes had little choice as project funding was impossible to get from investment bankers who don’t look longer ahead then the current bonus season.
This reduced number of service providers able to deliver oil and gas projects means that oil companies will pay the price when they start ramping up projects in the coming years. In some ways they were under so much pressure to reduce costs they had no choice but to slash and burn, but look closer and you realise that in 2017 you could have drilled 20 offshore wells for $500 million, compared to over $1 billion in 2014. This year will see modest increases in cost, but as more projects are sanctioned 2019 might see rates back to the previous levels, meaning a typical oil and gas project no longer works unless the oil price is pushing $90.