Big Oil Firms Crack the Whip over Service Companies

From REUTERS

By Balazs Koranyi and Gwladys Fouche

OSLO, March 26 (Reuters) – On a mission to crush costs, global oil firms are rewriting the rule book on how they deal with service companies.

Energy companies have sharply cut spending plans after a decade of double-digit growth, saving cash for dividends as stagnating oil prices and cost increase on mega projects worldwide have squeezed margins and angered shareholders.

Some now ask service firms to come into projects at the start, ditch some tailor-made designs in favour of standardised solutions and stay with projects longer to reduce the number of contractors involved, moves that reduce costs but favour bigger, integrated firms.

Oil service shares have suffered over the past year, with European firms hit the most. Analysts at UBS estimate they trade at 14 percent discount to their 5-year average with a further downside risk as investors adjust to a lower growth scenario.

“It is evident that the problem is not the services making supernormal returns but rather, given the persistence of execution issues, that something in the contracting model needs to change,” UBS said.

“Now is the time of integration, with one service company doing everything with the client from planning the well to building it,” Torjer Halle, the chairman of Schlumberger’s Norwegian unit said. “Size matters and (integration) will happen in the industry.”

A big extra cost has been that oil companies have built up redundant competencies with costly control systems since BP’s 2010 Macondo accident in the Gulf of Mexico, especially for expensive engineering.

“Over many years people have become very inward thinking and believe the processes they have built up are the Holy Grail,” said Ashley Heppenstall, the CEO of Swedish oil firm Lundin Petroleum.

Rising oil prices had also masked the sector’s eroding competitiveness and energy firms grudgingly swallowed cost blowouts or delays without revising their contracting models.

“We have seen what …. we refer to as ‘gold-plating’, specifications beyond what is really required,” Kristian Siem, the chairman of Britain-based Subsea 7 said.

“There is a lot of ‘it is nice to have’ but not ‘need to have’. If you eliminate that, that is where the big cost is.”

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