Exclusive: US shale oil producers ask service firms for 25% minimum discounts

US, WASHINGTON (NEWS OBSERVATORY) — Shale oil producers in the United States are striving to sharply reduce service costs amid falling prices and lower demand, according to company executives and a letter sent to leading suppliers.

These efforts underscore that the industry is desperate to cope with the market decline.

Oil companies, recently published spending plans for 2020, based on prices of $ 55-65 per barrel, on Monday faced prices below $ 35 after OPEC launched a price war amid low demand due to the devastating effect of coronavirus on the global economy.

Prices fell so quickly and to such an extent that shale oil producers who did not manage to sell their products at higher prices would soon become unprofitable, analysts say.

In a letter sent on Wednesday to field equipment and service suppliers, Parsley Energy operations director David Dell-Osso asked them to “review pricing” and help the company achieve cost savings of “at least 25%.”

According to Dell-Osso, such an urgent request was caused by the collapse of the oil market this week amid weakening demand due to coronavirus, the price war unleashed by Saudi Arabia, and increased production by other large producers. Parsley did not respond to a request for comment.

Parsley on Monday became one of the first oil companies to report a significant reduction in spending plans. The company also announced that by April it will shut down 3 of its 15 rigs.

Oilfield service executives expressed dissatisfaction with such requests, saying that many companies are struggling to remain profitable even at current prices.

“Anyone who is stupid enough to ask for a discount today is just (an obscene word),” said the head of the drilling company, who wished to remain anonymous.

However, several oil companies have asked to lower prices by 25% and received discounts, said James West, senior managing director of investment bank Evercore ISI.

Some service firms have moved to reduce their own costs. At Liberty Oilfield Services, executives agreed to a 20% pay cut.

Oilfield services firms “subsidized exploration and production over the past few years and barely kept afloat,” said Robert Collavey, CEO of Range Valuation Services.

“There will be many companies that find it difficult to survive.”


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