How can the oil industry cut costs?
Outside the energy industry’s premier conference in Houston this week, a qualified petroleum engineer, immaculately dressed in suit and tie, has been holding up a sign saying: “Please hire me!”
He has been a victim of the sector’s worst downturn for three decades, one of the 95,000 people who have lost their jobs in the US oil industry since 2014.
The odds are against him. Oil companies are working to put in place lower cost bases that will enable them to survive in a world in which crude prices could remain at about $50 per barrel for many years to come.
Two years ago John Watson, chief executive of Chevron , observed that “$100 per barrel is becoming the new $20”. He meant that the cost of finding and extracting oil had risen so much that companies like his needed a markedly higher crude price to achieve the same profitability that had been possible at significantly lower levels a decade earlier.
Today, it seems that $50 is the new $100.
As Ali al-Naimi, Saudi Arabia’s oil minister, warned executives at the IHS CERAWeek conference on Tuesday, producers of higher-cost barrels “must find a way to lower their costs, borrow cash, or liquidate”.
Oil is a cyclical business, and there is a general consensus in the industry that current prices of about $34 per barrel for internationally traded Brent crude are unsustainably low. But oil executives are not expecting a rebound to anything close to the prices of $100-plus that seemed barely adequate only two years ago.
The US shale oil industry , which helped precipitate the collapse in oil prices with a debt-fuelled production boom, is in dire financial straits. Continental Resources and Whiting Petroleum , the two largest producers in the Bakken formation of North Dakota, one of the heartlands of that boom, said this week they were stopping bringing any new wells into production in the region.
When prices do pick up again, however, industry executives say activity will recover and production can start to rise again. It may take time to come back, depending on investors’ enthusiasm for committing fresh capital, but shale could act as a long-term cap on prices.
David Hager, chief executive of Devon Energy , an independent production company, says that at $55 to $60 oil, “the vast majority” of US shale fields are economically viable.
Others put the number rather higher. Scott Sheffield, chief executive of Pioneer Natural Resources , another leading independent, suggests oil would need to be $60 to $70 for US shale production to grow. No one, however, is talking about $90 or $100.
Everyone in the industry is going to have to learn to compete at prices influenced by US shale. And given the uncertainties involved — the US shale business is so new, it has still not yet been through one full cycle of growth, downturn and recovery — it makes sense to take a cautious view of how far prices can rebound.
As Ryan Lance, chief executive of ConocoPhillips , the largest US exploration and production company, puts it, the upturn will come, “it’s just you can’t bet on it coming quickly . . . You’ve got to be prepared for it taking a little while longer”.
At BP , they are preparing for the company to be able to cover its capital spending and its dividend payments from its cash flows with oil at about $50.
Last year, BP said it was aiming for that break-even at $60 oil, but Lamar McKay, the newly-promoted deputy chief executive, says executives believe they can “probably do a bit better than that”.
Some of BP’s cost reductions come from driving down the prices charged by suppliers, but about a half to two-thirds, says Mr McKay, come from “self-help”: efficiency improvements including job cuts. BP has announced it is losing 7,000 jobs, and Mr McKay says that he expects to go “quite a bit beyond that” by the end of the year.
BP’s proposed Mad Dog 2 oil project in the Gulf of Mexico has been redesigned, for example, to make it less expensive, and now the company is haggling with suppliers to make the economics work before it commits to the investment.
Other companies are making similar moves. Bespoke engineering, customisation and bureaucratic management structures are being jettisoned, to be replaced by standardised designs and leaner organisations.
Statoil , the Norwegian oil company, is aiming to cut the price needed for its US shale oil operations to break even from $90 per barrel in 2014 to $50 in 2018.
“It’s a revolution in a company like ours,” says Torgrim Reitan, Statoil’s head of development and production in the US. “To set up the right agility and accountability so that we can move quickly.”
Marvin Odum, the head of Royal Dutch Shell ’s US business who announced his departure this week, says the company has a similar approach for its North American shale oil and gas operations.
“The cost structure is coming down in a very sustainable way,” he adds. “As we get down into the low 50s and now into the 40s in terms of the break-evens . . . in the sweet spots [shale is] a globally competitive resource.”
The industry has been here before, not too long ago. In late 2008 and early 2009, oil prices were also in the low $30s, and there was talk about a reset of the oil companies’ cost bases and ways of working. But then oil rapidly rebounded.
“I barely remember it,” says Mr McKay. “The fundamental change that’s necessary in the behaviour of vast numbers of people — operators and contractors alike — didn’t have time to take root . . . It sobered everyone up for a moment, and then the party started again.”
He thinks those same mistakes may not be made again.
“This feels more fundamental,” says Mr McKay. “The surprise of 5m barrels per day of US shale, and the speed with which that was brought on: that’s a fundamental supply and demand issue that’s got to be worked out.”
SOURCE: World Economic Forum