Managing Oilfield Service Cost Inflation in a Tight Labor Market

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“Oilfield service cost inflation and access to quality crews might be a constraint for some. The challenge for E&P companies is most will budget revenues conservatively (to the strip) but the reality is costs could escalate to reflect closer to strip prices if activity levels increase more. At our $54/bbl price deck, we see 0-5% service cost inflation but at strip prices closer to 10-12% is probable. Some of these costs can be offset with drilling and completion efficiencies but that is likely limited to around 5%, on average.” – RBC

In 2018, analysts expect to see a 20% increase in the horizontal rig count and a 50% increase in additional frac fleets in Lower 48. The recent oil price rally and a relatively bullish commodity price outlook have sent E&P and oilfield service (OFS) companies scrambling to position themselves for increased demand.
Drilling & Completions Market Day Rate

As overall oilfield activity increases, the demand for contingent labor rises. According to RigUp data, the number of jobs in OFS nearly doubled from 2016 to 2017. It’s likely that we’ll continue to see those numbers rise this year.

Oilfield Activity

Take Midland — a good indicator for oilfield job trends. In mid-2017, employment growth was outpacing labor force growth by double, and unemployment was nearing historic lows. As we saw in 2011-2012, a labor market this tight leads to OFS cost inflation and a significant degree of difficulty sourcing high quality contractors.

Midland Unemployment

 

As unemployment drops below 3%, the challenge of sourcing contractors isn’t limited to small companies. Even large majors and OFS companies struggle to acquire and keep high quality contingent labor, despite housing large, dedicated human resources functions.


Wall Street analysts expect a 70% increase in frac fleet demand and a 25% increase in horizontal rig demand this year. As we exit this cyclical trough in commodity prices, E&Ps and OFS companies are looking to quickly and efficiently scale their operations. And they’re turning to RigUp to access high quality contractors at competitive prices, which is critical to mitigating rising services costs. The old labor sourcing method of using fragmented consulting firms and small job-placement services doesn’t work in a world where rig efficiency and frac intensity are increasing while cycle times decrease.

Public versus Private Jobs

Let’s look at major services companies. Many today have chosen to partner with RigUp.  As demand for oilfield services picked up, their traditional methods for sourcing crews broke down. Historically, these companies were beholden to antiquated supply chain tools and a phone and email tag system that led to unread emails and missed phone calls going to hundreds of fragmented labor providers.

In this upcycle, that way of doing business is slow and limited. Major oilfield service companies needed quick, reliable access to highly qualified skilled labor and a network large enough to handle requests across the Lower 48.

By using RigUp’s platform to source contractors, these major companies saw a threefold increase in their overall sourcing speed and a 40% decrease in contractor onboarding. That equates to crews getting to work more quickly and, from the outset, working more effectively.

And even more important for long-term cost control and labor retention, these oilfield service companies are no longer flying blind. RigUp’s analytics gives their partners insight into important market data — like current, location-specific market pricing — to help them manage labor costs and remain competitive as oilfield activity intensifies.

And at the end of the day, the contractors are happy, too. They get paid faster, and take home more of their pay. They also tell their friends about RigUp, which makes our network across the country incredibly strong. No matter where you’re operating, RigUp likely has a strong pool of contingent labor ready to get to work.

 

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