Slumps may be an important mechanism for assuring the ultimate health of the oil&gas industry, according to a study commissioned by major contractor Petroleum Services Network.
Without such shocks to the system, companies can become complacent, bloated, inefficient – in itself a potential recipe for disaster.
The North Sea industry has lived through three major oil-price shocks over the past 25 years, but it is this latest slump that has partially overlapped a wider recession – the most dangerous global economic downturn since the 1930s.
For Aberdeen, Europe’s Energy Capital, each has been cathartic; however, two out of the three were out of step with wider recession events while the latest overlaps – but only partially, and the fundamentals are different.
In their report, Riding the Rapids: leading the oil and gas industry through recession, Professors Rita Marcella and Dorothy Williams, together with Dr Naheed Tourish, of Aberdeen Business School – The Robert Gordon University, suggest that periodic recession is a necessity in order to rebalance market forces and prepare the economy for longer-term recovery.
However, though the 31 industry leaders selected for interview in the UK and North America offered varying opinions, it appeared that perhaps some in the industry had learned from past shocks and were evolving their business model to cope.
“Some of the companies participating in our research are shouldering the burden of that rebalancing through contracting margins and are doing so, in the main, in a spirit of calm leadership,” say the report’s authors.
“Many of the companies, particularly those performing well, were seeking to reinforce good practice rather than make massive change in response to recession.
“One participant reinforced the theme of pragmatically continuing to manage well while instituting economies in delivery, rather than seeking to put in place quick-fix solutions.
“Many participants spoke about the importance of focus, not just on cost but on all aspects of the business and the product.”
Not everyone agreed, with one participant suggesting that “the oil&gas industry had not learned lessons from its traditional volatility”.
The authors said: “There was a sense among participants that both boom and bust presented their challenges and that, potentially, a cycle of highs and lows was necessary in the oil&gas sector as it allowed the industry to realign itself periodically.
“Another participant supported the argument that streamlining costs was one of the positives derived from the downturn and placed the industry in a stronger position to move forward.”
Slumps lead to job losses, despite all the good-times rhetoric about the need to sustain greater consistency and constancy on the employment front.
As one respondent put it, “It’s like this – if contracts aren’t being renewed, the staff have to come off the books”.
Bob Ruddiman, head of energy at law firm McGrigors LLP, who has been closely involved in the Riding the Rapids project, told Energy: “Over the years, we have coped with volatility of the oil price, but never before has it been linked so strongly to a credit crunch and squeeze on capital markets. It’s suggested in the survey that oil&gas sector companies have not learned the lessons of past recessions, but I think, this time, it could be different and new business models will emerge.”
Duncan Skinner, PSN’s chief financial officer, agreed with Energy that a slump had the potential to purge an industry such as oil&gas, enabling it to take stock and emerge leaner, fitter and better able to take on the future.
And he had good news for Europe’s Oil Capital just in time for Offshore Europe: “We, in Aberdeen, because of the oil industry, were probably last into this recession; and, by the looks of things, we’ll probably be first out.”
He added that, about a year ago, it looked as if the city might even escape the global slump.
“There was a feeling that we might get away scot-free. There was still a lot of optimism in the industry. It shows just how complacent we can get … many people forgot that this is a cyclical industry.”
