Fifty shades of yellow

“There is plenty to compete over, but we do not need custom-made valves… or even 50 shades of sub-sea yellow,” Statoil chief executive Eldar Saetre said on the first day of an industry conference in Stavanger, Norway, this week. He, in effect, set the tone for many discussions there on how the industry must change its culture of doing business and increase collaboration if it wants to stay afloat when oil prices are lower.

The “50 shades” comment was a joke only to some extent. It refers to a serious issue in the industry, which another high-profile participant described as “everybody wants their own brand on sub-sea installations”.

“We come from a culture where we took pride in new and tailor-made solutions, starting every project from scratch”, instead of using cheaper standardised options, Saetre said.

Before oil prices began to slide in the second half of 2014, this culture of high costs had been a concern, but was often brushed off because money was flowing in. When the ONS conference took place in Stavanger two years ago, oil prices were at $100/bl – double the current level – and a property in North Dakota was more expensive than one in New York thanks to the US shale boom, Saetre noted. “Falling oil prices then exposed us all,” he said.

To balance their books, oil and gas companies have slashed investment and operating costs over the last two years, not least because they “have attacked the supply chain aggressively”, as ConocoPhillips chief executive Ryan Lance put it. This “attack” meant that suppliers and contractors have been forced to agree to sharply lower contract rates.

Producing companies acknowledge that they need to learn to succeed in the much lower profit margin environment. Saetre compared the situation in the industry with the Olympics that took place in Brazil this year – coincidently, one of the countries where Statoil wants to increase its operations.

“It is fascinating to see after years of training and preparation how small the difference is between winning a gold medal and coming back empty-handed,” he said. “These small margins will increasingly matter in our industry as well. So, we need a culture where we always improve, where the best performance is tomorrow, irrespective of where we are in the commodities cycle.”

But the big question is whether the industry has learned from its mistakes, or whether costs will spiral again as soon as oil prices rise. And they will rise, executives say, because underinvestment in future output could hit global supply well before the end of this decade.

“I do not think [cost-cutting] will be over for some time to come. I think we still have a long way to go when it comes to cost takeouts and efficiency improvements and re-scoping projects,” Shell chief executive Ben van Beurden said. “When it will reverse is probably when we will see the tightness in the market being so much that again the industry will struggle to provide the resources, to provide the supply chain to respond to the growth in demand. And then I think we will see a reversal again.”

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