The global oilfield service (OFS) sector is expected to slash spending by $100 billion this year as oil prices continue tumbling to historic lows with the U.S. shale market being hit the hardest, according to a Rystad Energy analyst.

Many E&P companies have unveiled budget cuts over the past few weeks to cope with the slump in oil prices—a bulk of which has been made by U.S. shale operators. On average, shale companies have revised budgets down by 30% this year. As a result of the curtailed activity, the number of well completions in the U.S. is expected to drop by 40% in 2020, Audun Martinsen, head of energy service research at Rystad, said during a webinar on March 27.

On the supply chain side, Martinsen explained that well-related services—which will experience 70% to 80% budget cuts—will feel the most pain. This includes land and offshore drillers, drilling tools and services, pressure pumping and completion services.

In a battle for market share, margins of the pressure pumping sector will also drop by 20% this year. Consequently, the average well cost could go down by 10% in all the major basins of the U.S., according to Rystad Energy forecasts.

Other sectors such as subsea, equipment construction and maintenance services are expected by Rystad to steer the downturn in a better way and run through long-term agreements. However, payment and execution will be delayed, Martinsen noted.

Rystad also predicted more than one million OFS jobs could be cut this year as projects are deferred and delayed, with onshore services bearing the brunt.

An estimated five million people are employed globally in the OFS sector. Contractors are predicted by Rystad to scale down by at least 21%. In the U.S. shale market, the situation could be worse for OFS providers, the firm said, with 30% expected layoffs. 

Global Demand and Supply Outlook

The oil and gas industry is facing a historic slash in demand, as experts forecast crude consumption could fall as much as a quarter next month because of global lockdowns as the coronavirus pandemic continues to spread. Aviation and passenger vehicles—which constituted 34% of global oil demand in 2019—are the primary drivers of the global oil demand crash.

“While aviation is grabbing attention, it is actually ground transportation that is a bigger factor in impacting oil demand,” Christopher Page, senior analyst at Rystad, said during the webinar.

Page added that several countries in North America, Europe and Southeast Asia have imposed stricter measures last week, resulting in a large reduction in traffic. At this rate, oil demand could possibly drop by 16 MMbbl/d in April. 

However, the demand could bounce back relatively quickly once restrictions are lifted.  

On the supply side, OPEC+ is expected to ramp up production by 3.5 MMbbl/d in May compared to February levels, which according to Page is a “dramatic increase given the crash in global oil demand.” The increase in supply will be driven by factors such as Libyan production coming back online and Saudi Arabia increasing production.

In the U.S., if WTI could recover and maintain at $30 per barrel, Page said oil production will begin seeing a significant decline by September. He predicts more than 1 MMbbl/d of U.S. production will be shaved off compared to 2019 levels. However, if the price drops to $20 per barrel, the production decrease will be more dramatic and could begin as early as June. If the low-price levels continue until 2021, U.S. oil production will further decline by 1.9 MMbbl/d, he said.

In conclusion, the imbalance between overall crude supply and demand paints a very bearish picture, Page said.

“From February through July, we see significant builds in overall crude supply and crude demand, which we consider to be the ‘mother of all market supply surpluses,’” he said. “There are significant downside risks in the second quarter with 5.8 MMbbl/d supply surplus, which is a significant build in stocks.”

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