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Hidden Costs of Getting Operations Back Up - Alpcan Gencer

For quite some time, it’s been on the news that nations worldwide are rushing to acquire gas supplies to stock up for the coming winter. While a certain number of different factors from demand to production have contributed to developing this situation, we’ll be focusing on the production side and the shortcomings we’re feeling in the markets right now.

Following the 2020 crash in the oil markets, numerous wells and production development activities had to be abandoned. In the U.S, the associated gas production from shale fields was ceased from oil wells that could not be run feasibly under the market conditions back then. This had a major effect on the available supply of gas, especially on the Henry Hub ticker, as the price of gas had suffered a relatively minor setback during the crash. 2 years later, as markets are getting back on track with the opening of economies, we’re witnessing a relatively fast recovery in demand with a lacking production to counter it.

The abandoned wells and fields have to be brought back online to become operational again; however,, it goes beyond simply pressing a button to start the drilling again. Numerous wells and fields will have to be serviced as they were left underinvested throughout a large portion of the pandemic. The well efficiencies have probably dropped too, and on a different note, some of the equipment to service the fields have also been left unserviced for some time. Especially with offshore drilling, frequent maintenance and servicing of equipment are paramount for the health of operations. Any sort of major mishaps could result in downtime of drilling rigs, and they do not come in cheap to operate daily.

It is quite likely that companies globally, especially in the U.S, are racing to service their equipment and bring in oilfield service companies to help increase their production efficiency, which is where the bottleneck is starting. In a recent Bloomberg news piece, drillers recorded that the cost of drilling has hit a record high. Being a rather niche and fluctuating industry, there aren’t too many original equipment manufacturers of oil&rig equipment. With customers lining up at their doors to get priority access to their services and equipment, it is quite likely that their offer prices have also skyrocketed, and the waiting lists are getting longer. The longer it takes for their goods to arrive at the hands of their customers, the longer it’ll take for those wells to start pumping again efficiently.

Just like how the oil crash of 2020 created horrendous market conditions for these equipment manufacturers, the boom we see right now won’t last forever as well, so we can take the current market supply chain situation as a given in the oil&gas industry. Naturally, newcomers to the market are not as welcome as they could be for some other industries. Over the course of the past decade, numerous companies were either forced to merge or be bought out by their competitors to survive these conditions. There is little that could be done to change the status quo right now. Keeping this in mind, we should also focus on a second, relatively less implied problem in the chain – human capital.

Rather than keeping their high-paying jobs under wage and being obliged with multiple secondary expenses, oil and gas firms have lately gone the way of having those jobs lent out as contracting jobs. When the oil price went down and drilling stopped, these independent contractors* were under no obligation to stick with their previous employers and massive shuffles of personnel in between companies took place. Companies with access to larger resources that weathered the pandemic rather well took the opportunity to attract these experienced contractors, and on the oilfields, some companies are now facing experienced labor shortages. Mistakes made in these field jobs are not cheap and especially not right now, so the price/daily rates these contractors are charging right now have also probably gone up in addition to the equipment costs. It’s a classical double whammy situation where the equipment and the person to fix the equipment are now in short supply, which is holding back the drillers from kicking up their operations in full force. Just like how the sudden drop in prices created numerous problems in the markets, the sudden increase in the prices will also create setbacks but won’t be permanent. They also won’t be cheap to fix as well for the small operators, and we will likely be hearing more and more about this topic as winter approaches until prices find a balance with the demand.


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