Oil cost and staff cuts should not wound the industry

The oil industry has two ways to react to lower oil prices: the near-sighted and far-sighted methods. With falls in the oil price, the immediate reaction is clear — cancel projects, cut jobs and demand lower rates from contractors. But this time will the industry also be able to cut costs strategically, laying the foundation for a more sustainable business, not another boom-and-bust cycle?

Before the fall in oil prices that started in the middle of last year, costs were getting out of control and, under growing shareholder pressure, a long line of companies had announced cuts in capital expenditure.

After Brent’s recent plunge below $50 per barrel, Saudi Aramco asked oilfield service companies in January for 20 per cent discounts. In the North Sea, four leading operators have told offshore workers to move from a “two weeks on, three weeks off” shift pattern, to two weeks on and two off. Trade unions are considering strike action in response. BP, Chevron, Shell and Total have reduced their rates for self-employed workers by up to 15 per cent.

Inevitably, sacking people is part of the response. Norway expects that as many as 40,000 oil workers out of 250, 000 could lose their jobs. BP released about 300 workers, 10 per cent of its North Sea workforce, in January.

Yet, after a period of adjustment, the industry should be able to cope with current prices. In the early 2000s, it invested in technically challenging projects despite oil prices which, allowing for inflation, would now be just $26 per barrel. Major projects started production in Canada’s oil sands, the icebound Sakhalin Island in Russia’s Far East, and in deepwater off Angola. Today’s oil prices are still higher, and technology has advanced enormously.

Much of the rise in production costs is not because of tackling more difficult projects — but to inflation in salaries, materials, equipment and services — and to poor technical capabilities of an overstretched workforce.

The consultancy IHS’s index of oil industry costs shows inflation of 129 per cent between 2000 and now, mostly occurring at the peak of the 2006 to 2008 boom. With little hiring during the 1980s and 1990s, the oil industry relies on a mix of veterans approaching or past retirement age, and enthusiastic new graduates.

Short-term cost-cutting and some redundancies are inevitable, particularly at smaller companies that may have their backs to the wall. Salaries will fall back, and rates for equipment such as drilling rigs may drop to where they barely cover operational costs.

But to be able to survive and grow, the industry needs to take the opportunity to establish a lower, more sustainable cost base. Rather than simply demanding cuts, oil companies can work with their suppliers to identify where cost reductions are possible. They also need to cooperate with other operators to avoid wasteful duplication of shared services such as offshore supplies and helicopters.

Technology will be key. For example, generalist offshore workers can be linked virtually to onshore experts so they can perform a wider range of tasks.

The consultancy Accenture has suggested using drones and robots to improve logistics. Common industry standards would save on duplication; “big data” analytics can optimise maintenance and field monitoring. Distance learning and accelerated training programmes should bring new staff to full productivity much faster than the traditional 10 or 15-year learning curve. In the shale oil sector, time to drill wells has been falling sharply, productivity improving as hydraulic fractures are placed more accurately.

Such technologies cannot be implemented effectively alongside staff cuts that decimate the scarce skilled workforce. Oil companies need to plan technologies, organisation and human resources strategically, and retain the people they need for the next upturn.

Otherwise we will repeat the past decade’s cycle — a shortage of good staff and suppliers, soaring costs and project delays, and weak, unprofitable growth.

Robin Mills is the head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis.

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