Having been made redundant as a result of the oil price collapse in 1986, colourfully determined James McCallum is no stranger to the personal and corporate pain caused by volatility in commodity price.
However, it was redundancy that encouraged him to eventually set up his own company, so unleashing his own entrepreneurial streak. This was to lead to the creation of the building blocks for Senergy, now LR Senergy – a global diversified energy services business with over 600 people.
Here he explores with Energy why the current crisis is a defining moment in time for the oil & gas industry; it is a time when others may be pushed into their own adventures . . . by getting fired by an employer bent on slimming down . . . cost cutting.
McCallum: “As the oil price hovers around $50, we are embarking on a crucial period that will define the industry’s future. Spiralling costs of exploration and production in the industry are price differentiating energy plays and it is clear the current cost base cannot be sustained.
“Standard business practice by the oil companies in a commodity price collapse is to firstly cut contractors, followed by a review of internal resources and restructuring to cope with the major loss in revenue.
“The job losses this time have happened much more quickly than in previous downturns. With financial reporting now every quarter rather than on an annual basis, there has been nowhere to hide and the necessary adjustments have had to be made promptly in response to the markets.”
LR Senergy’s CEO says the current environment is very much like a severe stress test to determine which companies have their financial and operations in order. Those that spent too much to lease equipment and plant to drill, or have high operating costs, are suffering most.
While costs across the supply chain have risen dramatically as the pressure to meet increasing energy demands fuelled by short-term geopolitics and increased cross-sector competitiveness have ballooned, industry has not truly recognised the long-term implications of a spiralling market.
“Prices are already being cut to retain customers,” he says. “Like many in the supply chain, at LR Senergy, our margins haven’t changed but the cost of assets, materials and people have significantly increased.
“There has to be a level of adjustment across the whole industry that allows the supply chain to maintain its net margins but also drive its cost base down. This has to be done collaboratively and sustainably and not simply be a knee-jerk response to the “cut costs by 15-30%” rhetoric.
“This time, and once and for all, the whole industry needs to take a good long look at itself.
“Costs will inevitably fall as supply outstrips demand. But rather than letting the market and the oil companies dictate our cost base, we have to get costs under control through creative and collaborative solutions that deliver efficiency and value, and then ensure they don’t spiral again as soon as the oil price picks up. In a larger context, technology developments that help improve productivity, reduce costs and enhance quality are today’s pressing issues.”
With the exception of a brief period of uncertainty in the financial crisis of 2008, McCallum points out that LR Senergy has only operated in a robust and stable oil price environment, which the company has used to build a highly capable and respected business.
He explains that the firm must now respond with equal dexterity to a reversal of the commodity cycle which may take some time to return to a price point where its customers are making good margins. Having a differentiated product built on a solid reputation for excellence, as this firm does, has never been more important.
McCallum: “Our first response to the drop in oil price was to introduce a business efficiency initiative last year.
“We looked at how to reduce our costs, increase our utilisation and win new business.
“Our board took pay cuts and the difficult decision to make a small number of redundancies.
“Having suffered the pain of redundancy myself, this is never an easy thing to do, but we have a responsibility to sustain the business for the long term and protect the majority of our workforce.
“Companies in the supply chain, who don’t or can’t take the prudent steps to protect themselves may well go to the wall. I have a feeling we will see some small independent operators go bust and a garage sale of some companies throughout the supply chain in the next few months.”
McCallum reckons that technology solutions and behaviours will help save the day. Entrepreneurialism will be effective.
However, he says too that new technologies bring improvements, but many also bring new limitations, which require operators to revisit accepted risk-management techniques, develop their standards, procedures and methodologies, and apply their experience in new ways.
Collectively, everyone needs to look harder at technology to help solve many of those issues.
McCallum: “In the current climate, great companies will survive and new ones will be built as those with fresh ideas come to the fore.
“Among the lemmings, who will simply go with the flow, there are always the 5% who go in a different direction, who lead and excel.
“I believe LR Senergy is leading by example and demonstrating leadership, innovation, creativity at any point in a project lifecycle from reservoir optimisation to capex optimisation. As technical experts, who deliver what the industry needs – knowledge and the skills to apply that knowledge – we will be in demand.
“We have always had a diversification agenda and this will be more vital than ever. Our internationalisation strategy, which saw me move to the Middle East, has given us a truly global perspective, from which many of the doom merchants and naysayers in the North Sea could learn.
“It’s time for more positivity than negativity. I firmly believe that now is probably one of the most thrilling times to join our industry and be part of its reinvention.”
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