Oilfield services companies will have to consider “existential changes” to survive the energy transition as deal values came crashing down last year, according to a new report.
Total value of contracts awarded to oil & gas supply chain companies slumped to a 16-year low of $446bn in 2020, down 30% on 2019’s total of $641bn, according to research by Norwegian consultancy Rystad Energy.
The last time the industry saw a lower contracts total was in 2004, when $317bn of contracts were awarded.
The steep drop comes after a squeeze on profits as a result of the previous oil price downturn — which began in late 2014 — that has since been compounded by the effects of the Covid-19 pandemic.
“We urge service players to reflect upon their exposure and develop an active strategy to mitigate any shortcomings and further cultivate and articulate their strong suits,” Rystad said.
“Even if 2021 proves to be a better year, the service industry will struggle to replicate former glories, especially as the entire energy industry is being pushed to embrace the energy transition and offer less carbon-heavy solutions.”
The supply segment that declined the most in 2020 was construction and installation, which saw a 59% drop in the value of contracts awarded, followed by equipment, down 46%, stimulation, down 45%, and engineering, down 41%, according to Rystad data.
Drilling tools and services, seismic and geophysical, land and offshore drillers, subsea umbilical risers and flowlines and subsea equipment all declined by between 30% and 40% last year.
The supply segments that fared better relatively, Rystad said, were operational support, with awarded contract values dropping 9%, subsea services, down 9%, and offshore facility leasing companies, down 11%.
The only supply segment that managed to score better than in 2019 was maintenance, rising 2.1% in 2020 to $72bn.
“Suppliers now face the existential question: can they build viable, long-term strategies on their current operating model and market exposure?” Rystad said.
“This question is becoming more urgent as stakeholders such as the financial industry discriminate against oil and gas-related securities due to inherent energy transition risk — the idea that value is at risk as markets deteriorate during the energy transition.”
Rystad said it has developed tools to assess the inherent resilience of supply chain companies to the energy transition, adding that the oil and gas maintenance segment is currently the most resilient thanks to its “already diversified nature and its high reliance on operational spending”.
Operational and professional services also scored highly. Transportation and logistics, drilling tools and commodities, topsides and processing equipment, and the engineering, procurement, construction and installation sector followed closely behind.
At the other end of the scale, Rystad said, are seismic and geophysical companies, which have a set-up highly geared towards oil & gas and largely reliant on customer budgets exposed to exploration by operators. Other struggling segments were well services, rigs and drilling contractors and subsea equipment and installation.