Chapter 1
Consolidate or divest
Companies have the option of scaling up or down so long as capital is allocated only to opportunities that create a competitive advantage.
Many OFS companies in the Asia-Pacific region face intense competition, exacerbating overcapacity in a shrinking addressable market, significant debts and poor returns. Companies need to take a hard look at their value to both customers and the broader group of stakeholders, and allocate capital accordingly.
OFS companies can choose to scale up by acquiring businesses to increase market share, concentrate product and service segments and rationalize supply. For this approach to work, companies should have a concrete plan, capital resources to acquire sufficient market share and the requisite pricing power to maintain sustainable margins.
The other option is to scale down and be differentiated. This means divesting businesses that do not fit the strategic direction, are capital-constrained or are unable to build meaningful market share. Differentiation can be achieved by focusing on niche markets, driving offerings via technology and looking at new business models or partnerships.
In any case, capital must be allocated only to opportunities that allow the company to gain a competitive advantage in a particular product, service line or market.
Chapter 2
Shift focus of digital transformation beyond cost reduction
Besides reducing costs, digital technologies can also offer OFS companies opportunities to provide solutions for oil and gas businesses.
Digitization will be at the center of any transformation. OFS companies must now move beyond using digital technologies for cost reductions to become solution providers to oil and gas businesses by combining such technologies with existing product and service lines. OFS companies can play a greater role in enabling their customers to reduce the cost per barrel and accelerate time to first oil via optimized well design and planning, supply management, reduced operations and maintenance costs, and maximized operational uptime.
Since the COVID-19 pandemic started, oil and gas companies have rapidly deployed remote operations and cloud-based digital infrastructure to improve drilling efficiencies and sustain employee well-being. The current crisis is likely to accelerate the digital strategies of oil and gas companies.
Chapter 3
Transform culture with a returns-focused mindset
New metrics, measurement tools and leaders who can drive change are needed for effective cultural transformation.
The OFS business and its sales cycle have long been relationship-driven. How do you change an entrenched corporate culture that solely measures job performance in terms of sales made? The habits and attitudes that align with growth at all costs have led the OFS sector into trouble and will need to change. Shifting the corporate culture from a revenue- and growth-oriented mindset to one that focuses on returns will require new metrics and measurement tools. It also requires strong leaders who can drive the change, possibly new executives with proven return on capital employed experience outside the oil and gas industry.
Beyond the COVID-19 crisis, OFS companies must review and analyze what had happened, secure the business against future shocks, as well as deploy and adapt their future strategy in an agile way. Once they have addressed the immediate issues and started planning for what comes next, executives will need to turn their attention to potentially existential issues. Some of these include decarbonization, energy transition, long-term value creation and building a future-ready workforce.
Chapter 4
Diversify to capture opportunities
Diversification allows OFS companies to expand their addressable markets, gain exposure to end markets and redefine investor perceptions.
The need to address climate change will only become more urgent. Diversification is inevitable for the upstream sector and presents an opportunity for OFS companies to expand their addressable markets, gain exposure to end markets that are expected to experience structural growth and redefine investor perceptions.
OFS companies can consider these options:
- Help operators become more sustainable by developing technologies to measure and capture emissions, as well as equipment, operations and products with lower carbon emissions
- Follow the lead of traditional oil and gas customers by increasing exposure to low-carbon energy sources, such as solar, wind and hydrogen, which are likely to experience structural growth in the coming decade
- Lead the energy transition and enter non-energy markets, developing a new customer base beyond traditional oil and gas customers
The Asia-Pacific OFS sector’s expertise in development and engineering, operations and maintenance, and project management is valuable to industries within and beyond energy. As entry into new sectors is likely to be highly competitive and protected by incumbents, smart strategic decisions will be vital. The company’s areas of expertise, assets and agility in navigating new markets will determine its success.
Chapter 5
Create long-term value across a broader group of stakeholders
Capital and talent will shift toward organizations that create long-term value across internal and external stakeholders.
Environmental, social and governance (ESG) factors have become integral to the decisions of institutional investors. Capital and talent will shift toward organizations that create value in the long-term across a broader group of stakeholders, including employees, consumers, society and shareholders.
There is significant potential for OFS companies to identify and report metrics that communicate outcomes to these stakeholder groups, and institute systems, processes and mechanisms to measure ESG outcomes for corporate reporting to demonstrate the value generated by the business.
OFS companies should prepare for a world where the pandemic fallout intersects with the accelerating energy transition, in an environment where accessing capital and driving growth may require new, bolder approaches. Companies need to adopt new competencies and ways of doing business, and risk appetites may need to increase.
OFS companies need to create long-term value across a broader group of stakeholders in response to the oil price crash, COVID-19 pandemic’s impact and reduced addressable market.
Given these trends, the industry is expected to shift and restructure into four main categories: integrated companies, services providers, asset owners and commoditized players.
Integrated companies will offer a range of integrated services, via full ownership of companies in different parts of the value chain or via partnerships and alliances with key counterparties.
Asset-light services providers will focus on their service offerings. To succeed, they will need to leverage emerging technology effectively and stay agile.
Asset owners of rigs, vessels and pipelines will compete by offering differentiated assets or being the lowest-cost provider. Assets with well-integrated technology will deliver higher utilization and lower operating costs, enabling owners to partner with operators and other contractors as needed.
Commoditized players that cannot differentiate their offerings or do not operate in niche markets will have to compete on price. They could lose their direct relationship with the ultimate customer, such as the oil and gas operators, compelling them to take on the subcontractor role and further reducing their negotiating power. The smart use of flexible workforces and emerging technology will be critical to the sustainability of such businesses.
The ongoing disruption will shape how OFS companies expand their addressable markets, access end markets that are expected to experience structural growth and redefine investor perceptions. Regardless of the direction taken by OFS companies, bold actions are required to remain competitive.
Summary
The oil price crash and COVID-19 pandemic have severely impacted the Asia-Pacific oilfield services (OFS) industry. OFS companies must not only focus on immediate priorities, but also prepare for the next phase in a reduced addressable market.
They can scale up or down, shift the focus of digital transformation beyond cost reduction, transform the corporate culture, diversify and create long-term value across a broader group of stakeholders for a sustainable competitive advantage.
