The future of the OFS sector
WILL CHANGE BE INCREMENTAL, OR WILL THERE BE A FUNDAMENTAL RESTRUCTURING?
CHRIS ROSS, CHRIS CHAPIN, DAVID WOODS, AND HENRY XI,
THE UNIVERSITY OF HOUSTON CT BAUER COLLEGE OF BUSINESS, HOUSTON
BY WAY OF BACKGROUND, the collapse of oil prices from
late 2014 through early 2016 undermined the economic rationale
for development of new hydrocarbon resources by oil and gas
companies. They concluded that future oil prices would be
“lower for longer” and slashed their capital expenditures, thereby
removing much of the revenues from oilfield equipment and
service (OFS) companies.
To add insult to injury, the oil companies negotiated down
the prices they would pay for equipment and services, further
reducing OFS revenues. OFS companies were obliged to cut
their own costs and lay off tens of thousands of employees.
Figure 1 highlights how difficult of a time the OFS industry has
had during this recent downturn in oil prices.
In the aftermath of the price collapse, oil companies over-
turned the previous hierarchy of resource development oppor-
tunities. They successfully lowered the costs of developing oil
shales by exploiting multiple stacked horizontal targets from a
single drilling pad, drilling longer laterals and intensifying
fracturing with increased horsepower injecting substantially
greater quantities of fluids and proppants into the formations.
Instead of being the highest cost resource, oil shales undercut
the cost structures of most deepwater oil field and Canadian
oil sands developments. Further, development of low cost natural
gas shales led to an oversupplied US gas market and the con-
struction of US LNG export facilities, compounding an already
weak and oversupplied international LNG market and under-
mining traditional international pricing mechanisms.
The perception of “lower for longer” oil prices and the shift
in the hierarchy of resource development economics has led to
intense pressure to lower capital and operating costs and increase well productivity across all hydrocarbon resources. Overall, spending by oil companies is insufficient to support the