New Industry Structure Key to Lowering Project Breakevens

November 28, 2016

Oil and gas companies continue searching for ways to boost efficiency and lower costs in response to persistently low commodity prices. Alliance activity among oilfield services and equipment (OFSE) companies, which has picked up significantly amid low oil and gas prices, could prove an important part of the answer, according to a new report co-authored by The Boston Consulting Group and Morgan Stanley.

The report, New Industry Structure Key to Lowering Project Breakevens, examines these alliances and their potential effects on the oil and gas sector in detail. Among the report’s findings:

OFSE companies are pursuing or exploring alliances as a way to reduce costs and improve the attractiveness of their products and services in the marketplace.
Three main types of alliances are taking place: OFSE players teaming up to expand their product and service offerings; installation contractors joining subsea-product companies; and subsea installation contractors allying with engineering firms.
These alliances can greatly affect the competitive dynamics of oil and gas companies. This is especially true for the economics of deepwater projects.
OFSE alliances can entail risks for oil and gas companies. One risk is that relatively large aggregate market share represented by these alliances could give them considerable pricing power, which would raise costs for their clients: oil and gas companies.
For participants in these alliances, there are four key preconditions for long-term success: a strong customer value proposition; new and appropriate contracting models; early engagement and collaboration with clients; and real commitment and genuine alignment among the parties involved.

The report also notes that the continuing desire among oil and gas companies for engineering solutions that produce structurally lower costs, reduced lead time, and greater certainty of delivery, among other forces, could support additional OFSE alliances in this environment.

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