All eyes are still on oil producers’ bankruptcies but its the swathe of companies which service them — the drillers, equipment makers, personnel providers —  that are in desperate trouble.

Wood Mackenzie analyst Andy Tidey says manufacturing disruptions, travel restrictions, and the fact that service providers are in worse financial shape now than in 2014 are fundamental challenges for the entire industry.

“Margins are thin and balance sheets stretched with high probability of further consolidation, restructuring and insolvency in the supply market,” he wrote in a note.

“Just as the upstream supply chain was starting to clamber back to its feet, it now faces the very real threat of collapse. The resilience of the upstream supply chain is now at risk, which poses major challenges for the entire sector.”

There are few oil and gas services companies left on the ASX, MMA Offshore (ASX:MRM) is one, Stockhead monitors a thriving list of 92 foreign-focused and local small caps.

All of these rely on services companies.

Fewer, poorer

The oil and gas services industry was hollowed out in Australia following the price crash in 2014 from above $US100 a barrel oil to the mid $US30s.

In the US operators were able to extract discounts of up to 30 per cent for oilfield services, according to Wood Mackenzie data.

While the upshot of that was “impressive productivity gains” between 2014 to 2019 for producers able to extract an extra 14 million extra barrels of output (boe/d), prices for services contractors have never recovered.

The sector in Australia was recovering by 2018 as the Queensland gas boom drove demand for the survivors’ drilling rigs and prices were rising.

It’s not me, it’s you

Today, analysts say the oil and gas sector is back to 2014: production is being cut and services companies are seeing demand disappear and requests for discounts rise.

But this time a consequent production surge is unlikely.

A key issue now is that oil and gas field producers are cutting costs and that inevitably translates into fewer final investment decisions sanctioning new developments.

Tidey says globally, final investment decisions of new projects are expected to fall back to 2014-16 levels.

In Australia, the largest oil and gas companies have announced millions in spending cuts over the next two years, and the so-called second wave of $200bn worth of LNG projects due to be built over the next 10 years has been cancelled.

“Australian project deferrals have national economic implications. At the time of the GFC in 2009, Australia was just starting an LNG development boom. Between 2009 and 2015, the oil and gas industry spent $273 billion on development projects, mostly LNG. This was instrumental in Australia avoiding the worst of the GFC,” said Graeme Bethune, chief of energy consultancy Energy Quest.

“Now in 2020, the Federal Government is again having to step in to stimulate the economy, with measures costing around $200 billion.

“Unfortunately, this time there is no accompanying surge in oil and gas investment and there is unlikely to be until oil prices improve.”