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U.S. shale oil companies have asked oilfield service providers for price cuts of at least 25 percent as they grapple with tanking oil prices and pessimistic oil demand forecasts, Reuters reports, citing industry executives and a letter sent to oilfield service companies.
Shale drillers have made their spending plans based on oil prices of between $55 and $65 a barrel of West Texas Intermediate, Reuters noted, so the recent dive benchmarks took shook them to the core. WTI was trading at $31.78 a barrel at the time of writing with no prospects to go much higher any time soon.
This is particularly bad news for producers who have not hedged their future production at higher prices, according to analysts, and these will soon sink into the red. In this situation, their only chance for short-term survival seems to be oilfield service providers once again cutting their prices as they did during the 2014-2016 price crisis.
Reuters quoted Parsley Energy’s chief executive David Del-Osso as saying the company had sent a letter to oilfield service companies asking them “to reconsider your pricing” and offer Parsley price cuts of at least 25 percent.
Parsley Energy and Marathon Oil were among the first to announce cuts in their spending plans. Parsley said it will idle three of its 15 active rigs while Marathon said it would cut its spending by 30 percent from last year.
More companies are likely to follow suit with such announcements: this time, unlike in 2014, the oil price crash was fast and brutal, and, more importantly, largely unexpected as most expected OPEC+ to agree deeper production cuts, as they had on three previous occasions.
Oilfield service providers were forced to cut their prices during the last crisis to keep afloat. As a result, they suffered more than exploration and production companies and took longer to recover from the fallout of lower oil prices. If history repeats itself, the industry is once again facing tough times ahead.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.