In September, we published a blog flagging real sustainability risks to cost reductions in the oil & gas sector. This week's results announcements from the big oilfield services (OFS) companies show that the market may be turning very quickly.
The release of Q3 results from the major OFS groups suggests that this tipping-point may be happening sooner than we, and most survey respondents, expected. With oil prices steadying, Paal Kibsgaard, CEO of Schlumberger, suggested that it will soon be time to start "pricing recovery discussions with a large part of our global customer base". Halliburton and Baker Hughes also said that they see the market steadying and anticipate price increases in 2017.
How big a risk is this to the economics of the sector?
Our research shows that the operators are facing a big challenge to hold on to recent cost reductions. Responses to our Global Upstream Cost Survey indicated that less than half of cost reductions achieved over the last two years are truly sustainable. Added to this view, about 16% of respondents anticipated price increases in the next 12 months.
Digging into the cost reduction approaches taken over the last twelve months and the expectations for the next twelve months, highlights the challenge. The charts below show that 69% of respondents believed that tactical actions, such as price negotiations and activity deferrals, were very or extremely important to achieving cost reductions over the past 12 months.