The oilfield service sector is generally the first to feel the effect when inflation increases, and then the headwind becomes part of the dialogue among E&Ps and investors. Concerns of cost increases from the E&P perspective started during the first 2022 earnings cycle and amped by with each quarter. By year-end, management throughout the industry eyed rising inflation between 10% and 15% on average, with large companies budgeting for the low side in 2023 and small companies—many of them already struggling—staring down a rate closer to 20% in the year ahead, analysts said.

Historically, high oil prices paralleled increased spending. But when the Federal Reserve Bank of Dallas released the results of its midyear survey, the evidence was clear: Oil and gas companies were not investing in growth. Instead, they were directing cash to shareholders.

The net effect of the E&Ps’ capex strategy means service companies must be more competitive in developing the relationships to secure those funds. Once they surpass the competition, however, the more difficult tasks surface, service managers said.

Outfitting the project and supplying the service have grown into a monumental challenge. Like most businesses, supply chain shortages and limitations in skilled labor have plagued progress and jeopardized contracts. Industry insiders said those firms that succeed in securing contracts may struggle to execute them.

Supply chain shortages

When components of an acquisition become difficult, gaps that drive delays are created. 

“Supply chain challenges are the No. 1 related handicap thus far,” said Ryan Sampey, general manager of GLY-TECH Services. “Delivery times were two to four weeks previously, but now we have experienced some as far out as 16 to 18 weeks.

Sampey said that GLY-TECH’s services include gas dehydration, process equipment preventative maintenance and high velocity lube oil flushing. Each service demands critical components, such as chemicals, fittings and other vital details. Limitations in acquiring these products directly hinder its ability to service its customers, making customer satisfaction a growing concern.

Oklahoma-based Tubular Rollers LLC delivers tools that enhance personal safety and limit pinch-point incidents and lacerations. Similar to leadership at GLY-TECH, Tubular Rollers management said the firm struggles from the same crippling wave of supply chain hurdles.

“We are waiting on a supply of shafts constructed from a new aluminum alloy,” said Chuck Henkes, who works in business development at Tubular Rollers. “We received one batch in July and made over 100 shafts, and we do not expect our next order until the end of the year or possibly January 2024."

For Legacy Safety LLC, which provides safety services, the supply chain challenges come from data card shortages used in gas detection monitors, said Cody Heubaum, operations manager at the company’s Eagle Ford branch. These supply chain issues directly influence Legacy Safety’s ability to complete its contracts.

Labor shortages

Workforce challenges are expected to continue throughout 2023. The Real Economy Blog posted an analysis earlier in the year revealing an overwhelming lack of skilled personnel in a spring outlook, which has been felt throughout the market to date.

While the workforce mirrored the need before the pandemic, GLY-TECH’s Sampey said that is no longer the case. The pandemic instituted a culling of experienced personnel. Some left the oil and gas industry for fresh starts in pioneering new initiatives, while others took advantage of early retirement packages. Some still have not reentered the workforce anywhere during the two-year recovery after COVID.

“We continue to deal with employment challenges of qualified and skilled labor shortages,” he said.

Heubaum said Legacy Safety staffing needs face similar challenges. The safety of everyone on an oil and gas location becomes the responsibility of Legacy Safety when the firm manages gas detection on site, he said. It takes a particular skill to manage such a task.

“I see new developments in how companies can manipulate data. Focus seems to be directed toward the remote theme and removing the human factor where possible.”
—Chuck Henkes, Tubular Rollers

“It is hard finding people to do this job,” he said. “You might invest time, effort and funding in them, and shortly after that, they leave to take another job down the road making a few dollars more.”

Restrictive spending

The days of catering meals every shift, buying new vehicles every year and keeping inventories at elevated levels no longer exist, industry insiders said. The service sector must utilize a strategy of carefully competing to receive the money spent. While managing shortages in supply and personnel, Sampey said pricing must be gauged upon the customer’s need for the service and the level of importance they place upon it. If the customer fails to recognize the value, the company has less chance to secure a contract. As a result, pricing must be tightened to overcome the restriction on spending.

“The numbers game and the ability to minimize expenses are still key to oil and gas companies, and their frivolous spending habits have been tailored to be more reserved and limit overspending,” said Sampey.

Heubaum said there is no doubt that oil and gas companies embrace improvements in various areas such as automation, but that currently does not spark the release of funds required to make purchases and invest. Instead, industry trends reveal that funds are directed to areas of business vital to daily operations.

“I see new developments in how companies can manipulate data,” said Henkes at Tubular Rollers. “Focus seems to be directed toward the remote theme and removing the human factor where possible.”

While GLY-TECH has long served the oil and gas industry with services needed for daily operations, its research and development team has also established a service line of innovative technology to match demand.

“We have seen many new products arise relating to the flare gas market and how the EPA [Environmental Protection Agency] is coming down on Big Oil to perform a capture process,” said Sampey. “The industry is making strides in venting and flaring, capturing and reusing this gas as energy to support facility operations while minimizing environmental impacts. We have developed a new product line with our BTX Eliminator to help the flare gas process."

“Supply chain challenges are the No. 1 related handicap thus far.”
—Ryan Sampey, GLY-TECH Services

The direction forward

Analysis has offered a new perspective accompanying the service sector. The service provided must surpass others in importance and be offered at reduced costs. The funds available to the service industry are compressed, so the level of competition has heightened.

As the industry marches forward, experts said some companies will still attempt to break into the market and seize the benefits of the current boom and increased oil prices. Heubaum said the newcomers will try to enter the race and focus on offering services specific to daily operations but at a decreased cost.

“New companies will focus on existing services like torque and test to safety companies,” he said. “They might be successful if they offer reduced rates. Many oil and gas companies seek the same quality they currently receive but at cheaper rates.”

While companies like Tubular Rollers, who have created a niche product and benefit from patent protection, thrive in the current market, others will continue to combat competition. The challenges experienced are complex and can be potentially crippling.

To outplay the competition, some service company leaders said they must cut prices to keep and develop new business while managing supply chain restraints and skilled labor shortages. The difficulty enters when trying to meet contract requirements and deliver products and services as directed. Labor shortages invoke increased wait times, potentially leading to contract penalties or increased costs in paying inflated prices for quicker deliveries. The labor force available fails to include experience and knowledge, yet it demands higher wages, which often cannot be passed to the customer.

Heubaum said companies must develop a successful strategy to beat out the competition. The recipe for success includes a balance in operating costs and sale prices. Ordering in bulk and forecasting future orders must be exercised to defer supply chain problems. They must also make investments in employees when discovering trainable and capable talent. A basket of benefits and incentives can potentially partner with better pay to root employees and prevent job hopping for slight pay increases.

Industry analysts said securing business with must-have services companies will increase workload and allocate funding to develop new services that offer innovation at customer-deemed financially viable rates.