Head of GE Oil & Gas says oil industry cuts not done yet

Lorenzo Simonelli, the head of GE Oil & Gas, expects little regulatory resistance from GE's bid for Baker Hughes and sees plenty more room to cut costs in the industry.

Lorenzo Simonelli, the president and chief executive of of GE Oil & Gas, says the conglomerate’s possible acquisition of Baker Hughes will set up even more intense competition in an industry where priShow more

The head of GE Oil & Gas, Lorenzo Simonelli, sees plenty more room to cut costs in the industry as competition in oil services heats up.

The view runs counter to recent comments from some of his peers, including David ­Lesar, the chief executive of Halliburton, whose bid for Baker Hughes ran afoul of regulators and had to be abandoned earlier this year, only for GE to step in last month with its own US$32 billion bid for Baker Hughes.

Halliburton’s chief recently said that costs had been cut to the bone and companies like his would have to turn away unprofitable business in future rather than absorb more losses.

Mr Simonelli, the president and chief executive, says that unlike Halliburton’s offer, he expects the conglomerate’s bid for Baker Hughes will meet little regulatory resistance, thus creating a company that would leapfrog Halliburton into the No 2 spot in the oil services sector, behind Schlumberger, and set up even more intense competition in an industry where prices have dropped by between 25 and 30 per cent during a two-year oil price slump.

“After two years, clearly there has been a lot of cost reduction effort and unless you change the process those [cost reduction opportunities] diminish,” Mr Simonelli said in an interview while attending the annual Abu Dhabi International Petroleum Exhibition and Conference (Adipec).

“So our focus at GE is to really redefine the process.”

Whereas the Halliburton bid for Baker Hughes was designed to create a company with more heft to compete with Schlumberger head-on, Mr Simonelli says the marriage between GE’s oil and gas division and Baker Hughes will mean competing in terms of the range of products and services on offer.

As Mr Simonelli explains it, the new merged company will be aiming to tap into a mood in the industry that was captured by the unique summit preceding Adipec of the heads of the region’s most powerful national oil companies, including Saudi Aramco and Abu Dhabi National Oil Company, as well as chiefs of many of the biggest international oil companies, including ExxonMobil, BP, Royal Dutch Shell and Total.

One of their key topics was how to make the industry more efficient and hang on to cost savings and efficiency measures achieved in the past two years and take that even further.

“One of the things we’ve seen within the industry is that everyone is fighting for productivity and everyone wants to see a reduction in the cost per barrel,” says Mr Simonelli.

This was certainly echoed by oil company chiefs this month.

“This is a time in the industry, in the cycle, where you can change many things,” said Patrick Pouyanné, the chief executive of Total. “At $100 per barrel we accepted a few inefficiencies – at $50 a barrel we should not accept that any more.”

The new, merged GE-Baker Hughes pitch will be that it has “really become the first ‘full stream’ company, playing in the upstream with oilfield services and the equipment, in the midstream with liquefaction and the compression and pipeline capabilities, and the downstream with the equipment we put into refineries, petrochemicals, fertilizers”, Mr Simonelli said.

“That allows you to take all of the data below the mud line, on the reservoir characteristics, for example, and marry it with the equipment characteristics. So what you are going to find is that you reduce unplanned downtime, you improve the efficiency of the way you drill a well, you improve the oil recovery rates, and all of this is going to mean a lower cost per barrel,” he said.

First, GE will have to see the merger through and achieve the “synergies” it has laid, which include $1.2bn cost savings over four years, of which $1.1bn will be in materials cost deflation, lower discretionary spending, cuts in logistics, plus cuts in overlap such as the 25 per cent of replicated “rooftop” space across the 1,220 locations the two companies operate. But there are not many jobs expected to be cut, especially given the deep cuts already undertaken at Baker Hughes.

GE has said it will sell its water business in anticipation of any objections and Mr Simonelli said he expects the deal will close in the second half of next year.

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