Innovating the Path to Prosperity in the Oilfield

By Sanjiv Shah, Piper Sandler

Over the last 100+ years, innovations in the domestic oil and gas industry have made the United States both the largest oil and the largest natural gas producer in the world.

While this country is blessed with plentiful resources, innovations in oilfield services have enabled us to continue to exploit those resources while meeting the demands of the modern operating environment.

Many oilfield services companies have endured significant operational cutbacks and layoffs in recent years due to turbulent market conditions and capital starvation. The industry is now being called upon to meet an increased demand for services despite cost inflation, labor tightness and supply chain constraints. These challenges necessitate further innovation.

Market deterioration that began in late 2018 forced the oilfield services industry to underinvest in equipment maintenance and personnel recruitment due to lack of profitability and cash flow. This was further exacerbated by the COVID-19 pandemic. The pandemic caused a sudden reduction in demand during a time that OPEC+ was increasing supply, creating oversupply of oil and gas commodities as well as the equipment and services needed to drill, complete and produce.

In 2022, with the military conflict in Ukraine and the related sanctions, we have experienced a sudden reduction in supply while demand is increasing. This sudden reversal of supply and demand imbalance has driven resurgent demand for oilfield services and equipment.

Innovation is playing a key role in enabling operators and services companies alike to increase activity while improving efficiency, profitability and ESG practices. At Piper Sandler, we have an active M&A and capital markets advisory practice that helps oilfield services and equipment companies gain liquidity through a sale or access to capital. As such, we track many companies with technological innovations that enhance the oil and gas services industry.

The introduction of new solutions tends to gain traction when addressing the most pressing challenges facing customers (the oil and gas operators), and these often arise during the early stages of cyclical market recovery, which is when we frequently observe technology-driven market share gains. Recently, these challenges have primarily involved lower returns on capital, labor shortages, safety issues, supply chain disruptions and an increased stakeholder focus on emissions footprints.

As such, innovative solutions have focused on enabling operators to drill and complete wells cheaper and faster, maintain production for longer, reduce personnel, reduce safety risks, do more with less and reduce greenhouse gas emissions. Ultimately to be successful commercially, these innovations need to drive an economic value either directly by increasing profitability or indirectly by reducing the cost of capital (or both).

A few select themes that have become prevalent areas of innovation through our lens as a M&A advisor:

• While automation has been an overarching solution across many other industries, its penetration in oil and gas has generally lagged behind. However, we are now seeing automation thematically in many innovative technologies being applied at the modern wellsite, such as automated field ticketing/ERP systems to reduce waste, automated directional drilling systems that enable drilling faster and more accurately, automated completion systems that eliminate non-productive time between stages, reduced reliance on laborr and reduced exposure to human error. We’re representing companies with some exciting and disruptive technologies automating surface equipment during frac operations to dramatically increase continuous pumping time by eliminating human intervention between stages and facilitating switching out fluid ends while still pumping. Automation also has tangible environmental benefits from more efficiently producing oil and gas faster, longer and with fewer people (and therefore fewer trucks).

• As ESG continues to become more important across all industries, Piper Sandler expects to observe a significant profitability and/or cost of capital advantage for companies that facilitate reducing scope 1, 2 and 3 emissions profiles for oil and gas operators. This has driven a rapid growth in the number of new technologies to measure, test, reduce and capture emissions. We’ve advised some remarkably innovative companies in this subsector that are introducing solutions from very different perspectives, including gas cloud imaging surveillance and long-range laser networks for detection and quantification of emissions sources.

• Reducing volume of potentially (or perceived-to-be) harmful chemicals used during completion and production operations has long been an area of environmental progress, and innovation in the oil and gas chemicals subsector has addressed this concern. We have advised companies innovating nanochemistry for completion and production applications, deploying natural substitutes for synthetic ingredients that have higher cost and carbon footprints, and developing novel completion and production chemistry programs that have a material benefit to well productivity.

• With skyrocketing diesel prices coupled with ESG initiatives to reduce greenhouse gas emissions, switching away from diesel to natural gas burning engines/turbines has been an important trend in the industry that has driven capital investment and M&A. We have advised numerous oilfield services companies in strategically enhancing their next generation dual fuel or natural gas-powered exposure through acquisition. We expect this trend to continue, and innovation around logistics and processing of natural gas at the wellsite could further enhance cost savings and emissions reduction.

• Similarly, the “electrification of everything” theme has become prevalent in the oilfield, and it is driving innovation across equipment and services as well as primary/ backup power sources, storage and delivery. We’ve observed disruptive technologies building an emerging supply chain in batteries, engines, turbines, microgrids and many other areas all capitalizing on this theme.

Historically, innovation at the wellsite has generally accrued to the benefit of the oil and gas operators over the long term by reducing threshold economics of wells. However, we think the oil and gas services and equipment supply chain is poised to benefit from innovation and efficiency gains in the coming years, as the industry rewards companies capable of delivering innovation that will enable operators to increase hydrocarbon production in a more safe, environmentally conscious and profitable manner.

Sanjiv Shah is Managing Director and Global Co-Head of Energy & Power Investment Banking at Piper Sandler. He joined the energy & power investment banking group at Piper Sandler in 2008 as an analyst. Since then, Shah has worked on more than 100 M&A, strategic advisory, restructuring and capital markets projects, including playing a key role in the majority of the oilfield services & equipment sector's U.S. IPOs since 2014. Shah is based in Houston and was named global co-head of energy & power investment banking in July of 2019.