Supply Chain Woes Continue To Plague Challenged OFS Industry
Authors: Wright Blake 
Published: April 2022

Two years-plus into a global pandemic, we all have experienced the fragility and uncertainty that dogs the global supply chain for lifestyle goods and services. Remember last year when you couldn’t find a multipack of toilet paper to save your life? Or maybe you’re currently in the market for a vehicle, so you visit your local dealership—and find that the lot that’s normally awash with shiny, new vehicles … has three. And though they carry a manufacturer’s suggested retail price of about $25,000, they are being offered for well in excess of $30,000. These supply-and-demand anomalies can be directly attributed to disruptions in the supply chain—whether it’s manufacturing woes such as parts shortages or logistical snarls with goods stacked up at ports for a lack of dockworkers or truck drivers.

These same types of supply chain challenges that affect us on a personal level can also do a number on industries. For oil and gas, the situation is unique. The symbiotic relationship between oil companies and oilfield service (OFS) companies has run hot and cold for decades. Oil company supply chains are directly tied to those service companies that provide the tools and equipment required for oil and gas extraction and production. When things go sideways, service companies have historically retained much of the contractual risk. However, that doesn’t change the fact that when service companies are impacted by shortages, so are their clients.

This past year, as oil prices rebounded from pandemic lows and global demand started to creep back up, OFS companies were faced with overcoming gaps in the supply chain at their expense—some of which continue today.

“Supply chain and inflationary pressures also drove higher costs and delivery issues primarily across our OFS and DS [digital services] product companies,” Lorenzo Simonelli, chief executive at Baker Hughes, told investors in January. “Our teams have continued to work to offset some of these pressures, but we expect to continue to see some level of tension and disruption in these areas potentially through the first half of the year.”

Those impacts place pressure on profit margins for OFS companies, and oil companies will fight to keep their costs from increasing, which could create a tenuous scenario for 2022.

Many of the supply chain disruptions affecting Baker Hughes stem from logistics, some shortages more broadly, and disruptions in shipments. The company is offsetting the impact by employing new shipping routes and increasing lead times on specific items.

“Right now, pretty much about 90% of our suppliers are giving us 1-year lead times, and we have all of our 2022 on order there. To give you some perspective, if I go back 7 months, that 90% was about 20 to 30%,” said Simonelli. “That’s really what’s going on in the industry. We are planning for it. We’re working through it and operating in this new normal.”

Baker Hughes is far from the only oilfield service firm being affected by the “new normal.” Many are experiencing increasing delays in the delivery of tubulars, meters, and other basic oilfield equipment.