Oil Price Threatens Services Sector: Report

Exploration and production (E&P) firms are likely to slash their capital and operational expenditure by $100bn in 2020 and a further $150bn in 2021 if oil prices remain at $30/barrel, Oslo-based Rystad Energy warned in a research note on March 10. The cuts will heavily affect the oilfield services sector, it said, forcing some players out of the market.

Russia last week refused to commit to further Opec+ cuts, prompting Saudi Arabia to retaliate by seeking to flood the market. Oil prices, already low because of the impact of the coronavirus (Covid-19) outbreak, subsequently plunged on March 9. A supply war will likely continue until Opec+'s next scheduled meeting in June, Rystad said, and if no deal is reached then, E&P will adjust their budgets to account for the bearish market conditions.

Rystad previously said it expected overall oilfield service purchases to be flat this year, but now forecasts a 8% decline if oil averages $40/barrel or a 15% fall if oil is priced at $30. If the supply war runs into 2021, Rystad predicted that spending would fall by 7% at $40/b and 11% at $30/b.

“Now the E&Ps will turn every stone and cancel every single non-revenue-generating activity. In the US shale industry as many as 5,800 horizontal wells could be cut in 2020, which would more than halve the number of wells from the 10,900 planned for 2020,” Rystad's head of oilfield service research Audun Martinsen said.

The US shale industry would therefore bear the brunt of the supply shock, accounting for up to $65bn of the $100bn global spending cut, according to Rystad.

“Unfortunately, this volume war, if it continues throughout 2020 and 2021, will lead to a massive wave of bankruptcies and consolidation in the service market, whose debt obligations are set to grow 27% into 2021," Martinsen said. "Companies with low leverage and with healthy order books from past wins in 2018 and 2019 will be able to steer through the storm."

However, Rystad noted that a deep downturn could result in much-needed consolidation of the market, creating a healthier supply chain in the recovery.

Final investment decisions on some $191bn of greenfield projects had been expected this year, but Rystad forecast that $40 oil would result in less than $100bn being sanctioned.