The oil & gas industry is undergoing a major restructuring and nowhere is this more pronounced than in the United States.
Since the plunge in oil prices during the latter half of 2014 and early 2015, E&P operators around the world have made cost reductions central to their short-term business plans.
Oilfield service companies are coming under severe price pressure, including requests to reduce costs by 50% in some sectors, while rig contract renegotiations are increasingly visible and impacting the bottom line of drillers both on and offshore.
At the time of writing, cost reduction initiatives show no sign of abating, despite some signs of life in the oil price.
In the US, the focus on cost has come into particularly sharp focus. A number of factors influence this: the high volume of independently produced wells, an absence of national oil companies, strong supply chain competition and shorter-term contract lengths.
The combination of these factors has contributed to a tight squeeze for service providers across the sector, particularly onshore.
Aside from the oil price, natural gas prices have remained lower than expected, lagging well below $3 per million British thermal units (Btu).
While the Marcellus shale continues to ramp up production – currently more than 16billion cu.ft per day and growing – gas plays elsewhere are suffering, including out on the continental shelf where fewer than 10 jack-ups are working in that part of the US Gulf of Mexico.
This has severely limited investment by gas-focused operators in comparison with their global peers. Jack-up contractors and short-haul vessel operators of course are suffering as a result.
There are signs that crude output growth is finally slowing in the US overall.
As the industry gathers this month in Houston for the annual Offshore Technology Conference, it is encouraging to know that oil production from the US Gulf of Mexico is expected to continue rising over the coming years after an uninspiring start to the decade, held back by a drilling moratorium sparked by the Deepwater Horizon disaster and longer project lead times than for onshore developments.
An excellent example of large deepwater project successfully brought onstream in recent months is Chevron’s groundbreaking Jack/StMalo development.
For offshore operations and production services companies the gradual GoM recovery offers a range of potential opportunities.
Increasing infrastructure itself boosts demand for asset maintenance, inspection and logistics services – a wide ranging category covering companies from rope manufacturers to helicopter pilots.
Despite the maturity of the US offshore industry, the strenuous conditions of the North Sea continue to lead important advancements in combating corrosion, improving equipment longevity, fibre-optic monitoring and many others.
North Sea suppliers already contribute to every major Gulf project in one form or another and with advanced, higher capacity equipment this is likely to continue.
Capability requirements and suitability for equipment in more challenging environments is driven in part by the focus of projects in ultra-deepwater.
Going forward, all major projects offshore the US are expected to be in depths of at least 500m, with most beyond 1,000m.
In niche sectors of the offshore industry opportunities for proven technology and services are growing. On the production side, deepwater support vessels capable of handling higher currents, ROV technology and services, and fuel efficient logistics providers are examples of these.
Deepwater rigs, high pressure-rated subsea equipment, and deepwater survey providers are examples of opportunities on the drilling and construction side.
Again, for North Sea companies with proven experience of the issues related to developments of this magnitude and operational complexity, a long-term shift to ultra-deepwater will ensure the US Gulf contributes to company growth plans in the years ahead.
More production and demanding operational conditions aside, the offshore industry faces a challenging period.
Soaring costs, driven in large part by project complexity and engineer shortages, have challenged the entire supply chain in the US Gulf – all the while, onshore production has marched ahead both in efficiency and cost reductions.
As the market rebalances, E&Ps will continue to focus on reducing the cost of labour and equipment.
The reputation for North Sea businesses in Houston is wide-ranging, but tends to be one of high quality and high cost.
As oil prices climbed, a focus on adding long-term value and reducing Opex emerged in global markets, with customers willing to pay significant premiums for these types of high quality services.
But it’s not just Opex. In the current environment this is increasingly limited as focus switches to reducing Capex, particularly in the Gulf where independents and cash-flow-hungry majors dominate.
Breaking into the US market has proved challenging for countless world-class providers, even in recent years.
For those making the decision it requires long-term commitment in a region of higher highs and lower lows than international markets.
Maintaining a strong presence is also expensive with customers focused on timely, local delivery and service.
The oil & gas industry in the Gulf is a remarkably small world for such a large producer with the sprawling city of Houston as the capital.
Relationships between operators, suppliers and contractors large and small have been developed over decades. Breaking into these requires high-quality offerings which demonstrably add value and reduce cost for customers.
On top of this a strong, tangible commitment to serving the customers in the market can separate successful entrants, particularly in challenging times for customers and suppliers alike.
Despite a testing time for the oil & gas industry, the US market offers opportunities for companies able to identify pain points in a growing global producer. Technically capable firms in the North Sea are some of the best placed in the world to capitalise on these in the years ahead.
Andrew Reid is managing director of international analyst Douglas-Westwood
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