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Not An Oil Price Crisis

Not An Oil Price Crisis

This was one of the assertions made at the Oil & Gas Conference hosted by Burness Paull yesterday.   I confess I was surprised.  It certainly feels like an oil price crisis.

The assertion is an exaggeration, deliberately so, but it does help us to frame the challenge in a way which encourages us to act.  There is nothing we can do to affect the oil price and thinking about the crisis solely in those terms would have encouraged us to batten down the hatches until we can return to business as usual.  But since the cost basis was unsustainable at $100/bbl, that is not an option.

Merely reducing unit costs will not deliver the cost reductions required.  The percentage reductions would be too small and would be lost as soon as the price recovers, as it inevitably will.

Three points struck me from the conference.

The first is that in order to achieve significant and sustainable costs savings we need to have processes that are fit for a mature basin.  This is a particular challenge for the majors, whose processes are often designed for large capex projects or for operations where the additional assurance is merited by the revenues generated from high production efficiency.  Can they be as efficient as the smaller companies, where senior technical management are more hands on and have the discretion to cut to what matters in a particular case?

The second is the importance of standardisation and not over-engineering.  There was a great example shared at the conference of the same office of one company producing different designs for the same equipment (the company’s name was withheld to protect the guilty).  It’s an interesting challenge for lawyers also.

The last is probably the most significant, namely collaboration.  If the operators and the service companies can operate as a single team with shared objectives they can eliminate unnecessary activity and find cheaper ways to achieve the same technical objectives.  It is partly about the willingness of individuals to work in that way.  It is also about ensuring that the commercial arrangements facilitate those behaviours rather than discourage them.

The industry has taken dramatic steps to manage the short term crisis caused by the oil price.  Now the focus needs to move to creating a sustainable costs basis before the oil price recovers and to ensure that in managing the short term cash position we have not compromised the future.

Bruce McLeod
Partner

Burness admin