How integrated contractors are feeling the pinch

Oilfield services firms long for a return to the good old days, but some admit that the dysfunctional escalation of the cost base actually wasn't all that good for the industry.

If you ask how oil & gas operators are responding to the oil-price slump, it’s difficult to see beyond the numbers. BP and Shell have announced spending cuts of more than $40bn, Chevron is reducing spending by 13% and ConocoPhillips has cut 2015 capex by one third (about $2bn).

With the cost of a barrel of oil having dropped by approximately half since June 2014, integrated contractors have not been left behind. Schlumberger, the world’s largest oilfield services company, cut its headcount by around 7% – 9,000 jobs – by the end of last year.

Halliburton, the second largest, said in February that it would be letting go of 8% of its global workforce – around 6,400 people. At Baker Hughes, the world’s number three, and currently being absorbed into Halliburton, the cuts have gone even deeper, with 7,000 jobs expected to be shed.

Note: The chart is compiled using the daily price from 4 January 2000 to 12 January 2015. Data from EIA.

Riding the down cycle

“Our industry is clearly in the early stages of a down cycle, the same sort of cycle we enter once or twice a decade,” Baker Hughes CEO Martin Craighead told analysts during a conference call in January.

The headline figures are ominous enough, but underneath them are painful dilemmas for the contractors. “Our biggest fear is that we still have quite a few drill ships, jack-ups, and semis being built around the world,” one executive at a tier one contractor told Upstream Intelligence, asking not to be named.

“To put a cementing spread on a drilling rig and for that drilling rig not have a contract for six to eight months – that’s too big an investment, $4m or $5m, to not have any return on it for up to two years.”

Reviewing the pipeline

Work in the Gulf of Mexico in less than 500 feet has all but dried up, the executive said. The number of rigs the company is operating on the continental shelf now has dropped to a third of what the number was this time last year.

“We are trying to figure what assets we have, where, and we are not going to expose ourselves to any more risk than we have to,” the executive said.

“With deepwater it's not as bad but we are beginning to see drilling rigs coming out from under contract and there is no big hurry to re-sign them. That’s even with the very, very large UDW (ultra deepwater) drill ships.

Hoping for concessions from service companies

“I think when things were busy and rigs were going at a premium price, the intervention boat was very much a workable solution for the simple fact that it was economical for an operator and the waiting list for a drill ship was quite lengthy. Now it’s completely the opposite, especially with the new-built intervention boats – we have several smaller, mid-water semis in the Gulf of Mexico that would be happy to go out and work for peanuts right now just to keep their rig busy and to keep laying their hands off.”

As for the $40bn in spending cuts sought by operators, contractors are being asked for their pound of flesh.

“Most operators have come back to 90% of the service companies and to ask for concessions,” the executive said. “If you want to stay competitive, you almost have to give those concessions. The trick is being able to claw them back when times are a little bit better. I think everybody is positioning themselves as being in a commanding place when things do get better – to be in a good place to bring their prices back up. As long as they’ve got a sustainable amount of market share, their earnings should come right back with it.”

He added: “At the end of this deal, we’d like to come out with as much market share as we are capable of doing.”

Same as it ever was?

The industry may long for the days preceding June 2014, but going back to the way we were should by no means be the goal, says Dan Jackson, chief executive of a brand new consultancy, called io, which was born from parents GE Oil & Gas and McDermott International in January – perhaps the darkest days of the slump.

Jackson believes that the industry was dysfunctional anyway – fragmented, piecemeal – and that high oil prices just masked the problems.

“The oil price isn’t that low,” he told Upstream Intelligence. “Fifteen years ago it was a fraction of what it is today. We have been here before. What is not acceptable is the cost escalations, and the fact those escalations seem to be cyclical in relation to the oil price. We need to get more efficient as an industry and we shouldn’t have this volatility in the cost base.”

A more holistic view to project developement  

Jackson considers better blueprints for oilfields should be developed at the planning stage, to achieve a more holistic view of the whole development – the subsurface, the seabed and the facilities architecture.

“Currently the market is piecemeal,” he said. “Each piece of the field architecture is done independently in the capex stage, and in the opex stage it is done separately as well. The incumbent engineering companies advise the client on a specific component, whether it’s seabed technologies or SURF technologies, and they optimise that component, but the system as a whole is far from optimal.

“And then the industry ends up competing over the different components. It’s structured wrong. What we’re doing today is no different from what we did 20 years ago when a field development was a magnitude smaller in cost and ‘deep water’ was two or three hundred metres.”

Jackson believes that an industry overhaul was due long before 2014, and that the price slump just accentuates the need. “We can’t do anything about the commodity price of oil but we can do something about the cost base,” he said.

Whether oil companies will be in a mood to listen just now remains to be seen.