How E&Ps and OilService Firms Navigate in Tandem

James Constas, Managing Director of EnerCom spoke at The Oil and Gas Conference 21 on Thursday morning. Constas spoke about the cyclical nature of the oil and gas cycle, the dynamics of the current cycle and what might lie ahead.

By Constas’ calculations, since 1975, the oil and gas industry has been through 12 major peak-to-trough cycles, as measured by rig count. Currently, rig counts in the low to mid 400s points toward what appears to be the bottom of the current cycle, Constas said.


The market existed largely in equilibrium from 1986 to 2002, with more recent volatility in oil price being attributed to the dynamic of a “super cycle,” described by Constas as a period with a dramatic rise and/or fall in the price of oil. This is opposed to a more normal cycle where the price of oil is subject to change, but not nearly as dramatic as the price swing within a super cycle.

With the fall in oil price from over $100 per barrel to under $30 per barrel, the most recent down swing in the cycle has been among the most dramatic changes ever. For E&P companies, the downswing has led to costs reductions and increased efficiencies. For OilService companies, the downswing has caused companies to reduce workforce, focus on the best crews and the best methods, and reductions in drilling time—a tremendous cost savings that is passed on to the E&Ps.

The Effect on OilService

To survive this supercycle, Constas said E&P companies are changing the way they buy services and are rationalizing—reducing—the number of oil service companies that they work with. The reduced breadth of service contracts helps E&Ps consolidate expenditures and keep tighter control on where the money goes. Several OilService companies believe that land drilling is on the upswing again after the restructuring of costs by E&P operators.
OilService companies that have been forced to reduce employee head counts will need to be proactive in replacing crews if they want to fully take advantage of the expected upswing that lies ahead.


The projected upswing will undoubtedly change cost structures as OilService companies will need to add employees and retrain staff in health and safety procedures. Due to the extra expenses associated with these activities, the ramp up may be more costly than expected, Constas said.

The strength of the recovery will be driven by utilization and costs associated with adding rigs. E&P companies may not be able to retain the current lower well costs, primarily due to increased OilService costs. However, the efficiencies that have been gained during the downswing will likely remain in place and the well costs will not climb to levels seen before the downswing.

OilService Strategies Going Forward

One OilService executive said “If your solution saves rig time, it is a strong value proposition.” Mr. Constas outlined several strategies that would help OilService companies take advantage of the projected upswing in activity.

JC3The four points that were highlighted were:
•       Bundling Service
•       Risk Sharing
•       Pay for Performance
•       Leverage Indirect Channels
•       Innovate
These methods of consolidating a company’s value proposition will lead to streamlined offerings from OilService providers. This will enhance the value for both the OilService companies as well as the E&P companies. The two will work in unison to leverage cost reductions and rig additions to help move the industry in the best direction when activity ramps up again.

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