Cost & Price Analysis
This category is known for battles for market share between the various service providers. What is also common in this category is irrational bidding. Service providers may, especially bigger integrated companies, provide lower or break-even pricing in order to protect their market share or to gain or retain a particular client.
Price skimming is also common, whereby a service company will charge a premium for a high technology tool that produces significant benefits for the clients. Historically, this category has been dominated by smaller and niche service providers. However, in more complex applications, bigger integrated companies may be the only source. Due to the high R&D and G&A costs, integrated companies tend to price their services higher than smaller or niche service providers.
Overall, this category has very low price volatility for buyers and expected to show a further decline in 2nd half of 2020.
The cost models in this segment could be of two different natures, i.e. integrated companies who R&D capabilities and in-house assembly the tools in-house (SLB, BH, HAL & WRD) and service providers who source the tools from manufacturers. The majority of the tools is manufactured by third parties and available to many service providers.
Key cost drivers are:
- Maintenance costs. The reliability of remedial and repair tools is of high importance; hence, maintenance plays a key role. Following manufacturer QA/QC processes and inspection requirements is key. Any repair of the tools may require OEM facilities and engineers. The frequent calibration of equipment is critical, and on many occasions is very costly. Companies, especially smaller ones, can be tempted to compromise on recommended calibration intervals, but this, in turn, could lead to equipment failure.
- Pricing strategy. Manufacturers of intervention remedial and repair tools tend to provide better pricing to those service companies that provide bigger revenue to them. Hence, smaller and niche service providers can incur a higher purchasing cost for remedial and repair tools.
- Chemicals and other pumping consumables. The majority of products that are pumped into a well are commodities. Hence, those products are price volatile. Service providers tend to hedge on these products when providing the services on a long-term basis.
- Steel prices. The prices for steel, which is the major component of the majority of the remedial and repair tools, has been going down over the last five years, hence manufacturing costs have followed this trend.
- Personnel costs. Since the segment is comprised of numerous service providers of various sizes, and due to the call out nature of the services, employment patterns are mixed between permanent staff and a pool of temporary personnel. In addition, skill differences in the category are evident, whereby some jobs may require more specialized expertise, which is less prone to fluctuations. Overall, there is little cost volatility related to personnel.