How Oil Field Services Firms, Facing Decline, Can Find New Energy
- As oil and gas industry transitions to renewables, oil field services and equipment companies need to reassess their portfolio
- There are three broad strategies OFSE companies can consider implementing, each with its own pros and cons
- They can either stick their core competency or diversify their portfolio or shift to green energy
May 26, 2022 | Procurement Strategy
The global oil field services and equipment (OFSE) industry has been in a state of decline for nearly a decade now amid low oil prices and the growing pressure on the oil and gas industry to transition from fossil fuels to renewable energy sources.
In this scenario, OFSE companies need to re-assess their portfolio to cater for the changing landscape and carve a path towards a sustainable business model.
There are three broad strategies OFSE companies can consider implementing:
Strategy 1: Keep Doing What You’re Doing
There is a belief that sticking to your core competencies is the secret to building a better business. OFSE companies expect to endure the waves and keep playing in the oil and gas upstream business. This is under the condition that current oil and gas markets still offer attractive opportunities. Mergers and acquisitions could be in sight to gain a larger market share and provide a more holistic solution.
Advantages |
Disadvantages |
|---|---|
|
Intense focus on operational effectiveness leads to capital/ cost reductions |
Up and down cycles |
|
The business is made more resilient by learning how to overcome challenges of cycles |
Need to be prepared to consolidate or be acquired to remain financially stable. This leads to disruptions in business and operating models |
|
Reduce competition as peers exit the market |
Poor talent pool as the younger generation does not find the E&P industry as attractive |
Strategy 2: Diversify Your Portfolio
It is assumed that oil and gas will remain an important part of business in the short term but will eventually stall when the transition to renewable energy sources fully kicks in globally.
OFSE companies should start to identify new segments that leverage their current capabilities to have an advantageous position in an adjacent segment. Some attractive segments to complement a portfolio of hydrocarbons include carbon capture, utilization and storage, midstream services and power services such as maintenance of offshore wind farms.
Advantages |
Disadvantages |
|---|---|
|
Flexibility in allocating resources if the outlook in upstream oil and gas becomes attractive again |
No long-term growth or profitability in core segments |
|
Maintains presence in core competency |
Requires a hybrid organizational model |
|
Company can build new capabilities which allows it to be more responsive to uncertainties |
Challenges in identifying the correct segments to enter |
Strategy 3: Fully Shift to Green Energy
The growth in energy demand is likely to flatten as energy intensity (energy consumption per unit of gross domestic product) continues to decline. Although oil and gas will continue to account for a sizable portion of the total energy mix, the volatility limits the growth potential of traditional OFSE companies.
Additionally, emerging green energy initiatives such as electric vehicles (EV) and the rapid development of hydrogen fuel are expected to accelerate the decline of oil as a fuel.
As OFSE companies pursue new avenues of growth, the green energy segments are a leading potential candidate due to technologies moving down the cost curve.
Advantages |
Disadvantages |
|---|---|
|
Increases the ESG reputation of the company |
Lack of required expertise; will need to acquire new resources |
|
New attractive markets if energy transition accelerates |
Change in business and operating models |
|
Possible reduction in cost of capital depending on the type of green energy |
Potential for larger portfolio of unrelated businesses could make the company more decentralized |
Strategies OFSE Companies Need to Assess
With many challenges ahead, OFSE companies need to adapt quickly and lay a new foundation for the transformation of the organization. By considering the three strategies detailed above, it is imperative that OFSE companies look at it from a holistic point of view and assess:
- Where the competitive advantage is
- Aligning the business and operating model
- Defining a long-term portfolio instead of looking at the short term
Finally, an integral part of the success of OFSE companies is the implementation of the strategy, not just having the right strategy.
Learn how GEP can help OFSE companies be future-ready.
Author: Josephine Larang
