The ever-evolving energy market

Oil companies are expecting their service providers to react to cuts in CAPEX budgets and are renegotiating contracts with OFSE companies in order to meet their new targets

Björn Ewers, partner and MD of BCG Middle East.
Björn Ewers, partner and MD of BCG Middle East.

Over the past two years, the slump in oil prices has caused a ripple effect along the entire oil and gas value chain. The world is now entering a period of even more volatile oil prices and, in the midst of these unsettling times, the oilfield services and equipment (OFSE) industry has taken a particularly strong hit. This is largely due to the fact that a slew of major oil producers have planned, introduced, and set in motion cost-cutting initiatives.

The OFSE industry is a very important part of the GCC economy – with a size of about $65bn and almost 7% of the global market. Within the GCC, Saudi Arabia accounts for 40% of the market and is expected to grow the fastest, by about 8% per annum between 2017 and 2020.

Globally, oil companies are making significant cuts to CAPEX: between 10-30% of the CAPEX budget has been cut by IOCs and NOCs. From their perspective, oil companies are expecting their service providers to react and are renegotiating contracts with OFSE companies in order to meet their new targets. As part of their efforts to reduce costs and elevate efficiency, IOCs have also radically shifted their strategy from volume to value and this has had a huge impact on the bottom line of OFSE players.

In response to this, OFSE firms have reacted accordingly and have significantly reduced their cost base, including their workforce. For example, Schlumberger has reduced its global workforce by 26% since November 2014. Moreover, in recent years, the oil and gas industry’s returns have eroded amidst low and stable prices – and this in turn has made investors sceptical of the industry’s ability to create value.

Looking ahead, the offshore industry will continue to serve as a key source of production growth globally. In fact, 62% of new global oil production from now until 2020 will come from offshore – and this will generate an economic value of $65bn. Given this context, OFSE companies will have to reorganise their activities and focus on serving this segment of the industry.

Interestingly, the forces currently shaping the GCC’s OFSE landscape are different from those affecting the global OFSE industry. Across the GCC, energy players are increasingly applying improved and enhanced oil recovery techniques, designed to help them extract the maximum amount of oil from mature fields. OFSE companies are already familiar with this type of activity in other parts of the world and now, more than ever, they need to bring such expertise to the GCC. Naturally, today, this is the largest driver of spending for GCC NOCs looking to offset the production decline in mature fields.

It is no surprise that high decline rates are proving to be problematic for the region’s oil producers. For example, the Ghawar oilfield in Saudi Arabia, the world’s largest conventional oilfield, is already seeing a decline in production – the average production between 2011 and 2015 was 4.5% lower than the average production between 2006 and 2010, and 3.5% lower than the average production between 2001 and 2005.

GCC countries are determined to maintain their production capacity, so as to not lose market share. In 2015, mature fields accounted for around 36% of oil companies’ total external spending.

When it comes to gas production, it is now becoming as vital as crude production. The reality is, government gas price subsidies in several GCC countries have sparked a rise in demand. So, at present, some GCC countries like Kuwait, Oman and the UAE are actually importing gas.

Remarkably, an increasingly large amount of oil produced in the GCC is directly used for domestic consumptions. For instance, in Saudi Arabia, as much as 3MMbpd is used for domestic consumption. Consequently, countries such as Saudi Arabia and the UAE are looking to boost their gas production so that they can reduce their domestic crude consumption, further expand their exporting activities, and diversify their economies.

Overall, in the GCC, the total spend on gas is expected to grow by 4% over the next 10 years. This will be led by Kuwait and Qatar, with 19% and 7%, respectively.

Across the GCC, the growth of unconventional oil is also climbing to the top of governments’ agendas. This is driven by three main factors. First, unconventional oil sources can help GCC countries meet their capacity target. For example, by also producing heavy oil, Kuwait aims to increase its capacity to 4Mbopd by 2020.

Secondly, unconventional oil production can help address local consumption needs. For instance, following the completion of the Khazzan tight gas field project, Oman set out to extract around 1bcf of tight gas per day to meet its growing demand for energy.

Lastly, developing the skillset needed for unconventional oil production can help NOCs stay on top of technological advancements in oil and gas. Based on this, GCC E&P spending on unconventional oil is set to grow around 33% until 2017 (led by heavy oil). On their part, OFSE companies can also play a pivotal role in helping NOCs and local governments meet their national agenda goals, by providing the local workforce with the training necessary for the proper implementation of these new technologies.

With all this in mind, it is clear that the region’s OFSE industry is undergoing a massive transformation – one that has been long in the making.

To ensure success in such challenging times, OFSE players must now carefully and closely monitor regional GCC trends – and adapt their operations accordingly.

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Oil & Gas Middle East - August 2019

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