With oil prices falling worldwide, a lot of attention has been focused on what the decline means for drilling programs and energy industry employment.
As a wave of austerity washes over the industry, companies should remember that cuts made in response to a dip in oil prices now can have devastating repercussions for years to come – especially when it comes to programs such as safety that aren’t seen as contributing directly to the bottom line.
With crude prices at five-year lows, capital budgets have come under scrutiny and some companies are cutting back. ConocoPhillips, for example, said it would slash its capital budget by 20% next year because of weaker prices.
Chevron last week said it would delay its announcement on capital spending until early next year, presumably to reevaluate the viability of planned projects based on lower crude prices.
It isn’t just spending for new drilling that’s coming under fire, though.
“When oil prices fall, activities that are not core to the business tend to be the first to be cut,” said Ian Sutton, a chemical engineer and process risk consultant in the Washington area who writes frequently about offshore safety.
That includes critical programs such as safety and maintenance.
At the same time, many of the biggest – and potentially hazardous – projects, such as deepwater programs in the Gulf of Mexico, the North Sea and elsewhere are continuing apace. Weaker crude prices put pressure on the economics of these projects because it takes longer to repay the cost of drilling them. This added focus on costs can increase the potential for accidents.
Cuts to safety programs, training and maintenance are relatively easy for companies to make because they don’t impede operations in the short term. The problem is that they increase the likelihood of problems in the future.
In writing about BP’s previous safety problems leading up to the Deepwater Horizon disaster, for example, I found a pattern in which the company cut repeatedly cut safety and maintenance in other parts of its operations to meet short-term budget goals.
Even after accidents happened, the company remained blind to the long-term consequences of putting profit ahead of safety.
In discussing the problems that contributed to the near-sinking of BP’s massive Thunder Horse platform in 2005, then-CEO Tony Hayward told me that BP had cut thousands of engineers in the 1990s as oil prices fell. By the time it unveiled its greatest technological undertaking at the time, the company lacked the engineering expertise to execute the project effectively, Hayward said.
The same holds true for safety programs. While these sorts of issues may not be an immediate concern, the precipitous decline in oil prices since July underscores to the need for greater vigilance on safety in the coming years.
Fortunately, some things have changed since the last time oil prices plunged, in part because of the Deepwater Horizon disaster.
“Since the last downturn in the energy business, safety regulations have become more strict,” Sutton said. “Companies have less wiggle room than they may have had in the past.”
In the Gulf, for example, new rules place a stronger emphasis on safety and contractor management, Sutton said. Also, both offshore and onshore operators have increased their focus on developing better safety cultures.
Of course, it’s far easier for companies to embrace a safety culture when oil prices are high and profits are strong. The real test, Sutton notes, comes in the face of adversity.
“It will be interesting to see if the commitments to safety culture hold up if revenues are going down,” Sutton said.
Rather than cutting back, Sutton suggests this could be a good time for companies to step up their investment in safety and training. No one knows how long the current price drop will last, but there are some indications that growing global demand will begin pushing prices back up in the next year or two.
If that happens, the companies that have taken advantage of the downturn to improve safety may be better positioned to capitalize on the next upswing. While the industry tends to view safety and maintenance simply as added costs, safer drilling practices will save time and money in the long run, as petroleum engineer and safety expert David Pritchard pointed out in last month’s column.
“Now would actually be a good time to invest in training and safety, just as companies should invest more in marketing when business is down, not when business is going well,” Sutton said.
Companies that remain committed to enhancing their safety culture when times are tough are far more likely to emulate it when things are booming again. They owe it to their workers to ensure safety doesn’t fall victim to short-term budget cuts.
Loren Steffy is a managing director with the communications firm 30 Point Strategies. He is a writer at large for Texas Monthly, a contributor to Forbes and the author of Drowning in Oil: BP and the Reckless Pursuit of Profit and The Man Who Thought Like a Ship. Follow him on Twitter: @lsteffy; on Facebook or at lorensteffy.com.
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