THE upstream oil&gas supply chain is walking a tightrope between making cutbacks driven by the latest slump in oil prices and being ready for the next upturn in the fortunes of Big Oil, according to Schlumberger’s CEO, Andrew Gould.
Speaking at the CERA Week Conference in Houston last month, Gould said it was not possible to compare the present situation of close supply and demand dynamics with the mid-1980s crash, when there was a massive 15million barrels per day production overhang – yet, like the earlier crisis, the current collapse in commodity prices was being driven by a drop in demand. He pointed out that, even though major IOCs have the financial muscle to continue long-term development of complex, difficult fields and NOCs have the muscle to sustain their approach, turmoil in financial markets was serving as an accelerator on activity cuts.
Gould said the past few years had delivered a supply-chain boom, with Schlumberger delivering a compound annual growth rate of more than 20% over the period 2004-08, so doubling in size and creating 35,000 jobs. There had been massive overheating, with little gain in hydrocarbons production to show for the effort.
“The system created a great deal of its own inflation and inefficiencies, not only, dare I say it, in the service industry, but also in our customers’ projects, as witnessed by some of the extraordinary project overruns we have seen,” said Gould.
But then he warned: “The dilemma that we now face, however, is how to maintain a service industry that will support new increases in activity when demand returns and, at the same time, meet an acceptable level of shareholder return.”
Gould said that, of course, client petroleum companies wanted to reduce costs to reflect lower commodity prices and keep projects profitable and alive. And they would likely get their way.
“They are all more or less brutal in the way they approach this, and they will obtain lower costs. But although the total E&P investment has now reached somewhere between $350billion and $450billion, the inflation that I just mentioned has consumed much of that with little change in the underlying amount that has flowed into building hydrocarbon supply.”
Schlumberger’s CEO warned that it was vital to be ready for the upswing, but that service companies needed to bear a number of matters in mind while managing the downturn.
A “savvy” supply chain was needed, and fast; sub-contractors had to be factored in as they were a vital component of the supply chain; capex commitments could be reviewed to advantage including concentrating on reducing the cost of new equipment through design.
On people, Gould basically reiterated the message that Energy has pushed lately; don’t swing the jobs axe.
“If the investment in recruiting and training has been substantial since 2004 then the investment in retention must be just as substantial right now.”