Skip to comments.Kemp: Oil Industry Starts to Squeeze Costs, Wages
Posted on 02/01/2014 6:53:07 PM PST by thackney
Cutting the cost of everything from salaries and steel pipes to seismic surveys and drilling equipment is the central challenge for the oil and gas industry over the next five years.
The tremendous increase in exploration and production activity around the world over the last ten years has strained the global supply chain and been accompanied by a predictable increase in operating and capital costs.
When oil and gas prices were rising strongly, petroleum producers and their contractors could afford to absorb cost increases.
But as oil and gas production have moved back into line with demand, and prices have stabilised, the focus is switching once again to cost control.
"Operational excellence," a euphemism for doing more with less, is back in fashion and set to dominate industry thinking for the rest of the decade.
SPENDING DISCIPLINE Paal Kibsgaard, chief executive of Schlumberger, one of the largest service companies, has been emphasising "smart fracking" and other ways to raise output and cut costs for two years.
Speaking as long ago as March 2012, Kibsgaard warned: "In the past ten years, exploration and production spend has grown fourfold in nominal terms, while oil production is up only 11 percent."
"In this environment, we believe our customers will favour working with companies that can help them increase production and recovery, reduce costs, and manage risks," he added.
Schlumberger's website and those of its main competitors Halliburton and Baker Hughes all prominently feature technologies and processes intended to cut costs, such as dual-fuel diesel-natural gas drilling and pumping engines.
It is just a small example of profound industry shift from an emphasis on increasing production to controlling spending.
Issuing a shocking profit warning on January 17, Royal Dutch Shell 's new chief executive pledged to focus on "achieving better capital efficiency and on...
(Excerpt) Read more at rigzone.com ...
Supply Chain Responds
Let me guess where the oil industry will find the cheap labor they seek?
Can you say amnesty.
It takes a long time to train new drillers, petroleum engineers and construction specialists, and give them the experience needed before they can assume positions as experts and team leaders.
> When oil and gas prices were rising strongly, petroleum producers and their contractors could afford to absorb cost increases.
Sure, I’ll guess.
They’ll find it coming out of China factories, in the form of robots. Society, including the oil industry, will automate its way to oblivion as a smaller and smaller employment base has to pay welfare and unemployment benefits for a larger and larger base of the jobless.
BTW this avalanche of data indicating . . . paraphrasing from 1995 to 2005 the oil industry spent $9 billion to get 10 million bpd of global production. From 2005 to now, $200 billion has generated 2 million bpd of added production . . . started with Total last week.
It is a profoundly ominous thing.
This is not so much about labor as it is about suppliers pricing of hard goods. Pipe that used to cost 20 bucks a foot is now 60 a foot(put 15,000 feet of that in a hole), wire line has gone out of sight, steel, sucker rods, pump jacks, all have gone crazy in prices just as in or around any boom. Hookers are gonna get theirs and the grocer even gets his pound when a boom is going on.
These times of “adjusted reality check” are not uncommon in the “awl field” to get suppliers back to reality and things a little more liveable.
Did not take them long to move from fruit pickers to skilled construction jobs.
Schlumberger? Reducing costs? That’ll be the day.
Moreover, reducing costs with the blitz of inexperience. It’ll get better but it’ll be costly and take time. It’ll also take a lot less process and meetings and such and more just getting down to and taking care of work.
It’ll be the same as the last many bust cycles. Shut down, starve ‘em to the table and get back to realistic or something like that. ‘Course, the operators brought it on themselves by paying whatever they had to instead of just saying no. That is the way it is in a boom. Nobody says no for fear of being left behind.
It is a profoundly ominous thing.
There’s plenty of oil out there if people are willing to pay for it. The world has only tapped about 10% of the oil underground since the first oil well in western Pennsylvania 150 years ago. Fracking will extract another 5-15%. The first ten percent was cheap. The next 5-15% is expensive.
However, I don’t think oil is going to last much more than two decades as the world’s premier transportation fuel. I think rather that electric cars and natural gas trucks and buses will collapse the demand for oil.
But that’s another couple decades out.
Won’t be a bust cycle, just an adjustment. At least this go around. Don’t think it will slow down here for at least two or three years and no true bust unless there is some really off the wall world wide economic crisis and demand goes thru the basement.
Been thru a lot of them since the mid 50’s and I think this time it really is different. OPEC? Wish I knew what they had planned as they are less and less relevant here.
“skilled construction jobs.”
No way is their work anywhere near skilled!
They turn out crap just like the buildings in Mexico, they only look good from 100 feet!
I was not judging the quality of their work, just showing how they moved from
fruit pickers to construction jobs.
So have I been through a bunch of busts. The thing that could make this one different is the relentless and steep decline of shale. Offsetting that is the ubiquitous worldwide distribution of shale. If we can do it so can others. The barriers to entry are not that high. Shale fracs are mostly just glorified slick water treatments. What shell and Exxon are fixing to do in Siberia will be game changing.
The good news is I’ll have relatively inexpensive oil for my toys until I don’t need it and the hydrocarbon era will go on a bit longer still.
“So have I been through a bunch of busts. The thing that could make this one different is the relentless and steep decline of shale. Offsetting that is the ubiquitous worldwide distribution of shale. If we can do it so can others. The barriers to entry are not that high. Shale fracs are mostly just glorified slick water treatments. What shell and Exxon are fixing to do in Siberia will be game changing.
The good news is Ill have relatively inexpensive oil for my toys until I dont need it and the hydrocarbon era will go on a bit longer still.”
Have been thru the same cycles.
Technology seems to pull us up out of the down cycle.
First it was horizontal drilling, deep water, 3D, now stage fraccing.
The targeting of shales is a game changer, but not how all are predicting. It is a temporary thing for oil as the characteristics of oil moving through this type of reservoir is very difficult and is only assisted by fraccing. Needs nature’s help on natural fractures being present. It is a rare formation that have them.
Instead the big play is natural gas in the shales.
The new technology guarantees plentiful gas for many generations across the US and world.
I also agree that the oil service industry requires more than a illegal immigrant mentality to produce this oil.
New technologies require more expertise to execute to produce commercially.
The mega-projects are always costing more and taking more time to complete.
Probably due to being a high profile environmental risk in eyes of government.
Case in point is Gorgon. I was working this project back in 1988 to get commercialized, and it is not yet there.
Well said though I agree with you. I’m not so sure about the shale gas individual wells being as “durable” as all that after seeing how the Ft. Worth Basin / Barnett wells decline. The gas is still there though and restimulation seems to put some life in them.
Some of the Marcellus IPs are very impressive. I don’t have the time to look at declines. There ought to be enough production history by now to at least get some impression. Have you looked? The Fayetville was sure a big splash but seems to have fizzled out. SWEPCO dominated that but I have not looked to see how they are doing.
I quite agree that shale gas is a true game changer though. There is practically more gas than we can reasonably use. I also agree that technology will often come to the rescue. Still, there are only so many ways you can get a hole in the ground aren’t there?
The frac fluids and pumping are simple, the breakthrough came in the hardware design didn’t it?
Isn’t it amazing how much the service industry can charge for so many low skilled workers? The rub comes in having to pay for their mistakes. It costs us all.
all shale gas has those types of declines. (but beware not all stated shales are really shales at all, but some other lithology).
they have different economics, dependent upon a lot of things, but, other than geologic differences, vary chiefly on the transportation charge to get the gas to market and infrastructure available to the resource.
The Marcellus is the lowest transportation charge there is because of its location to the largest market in the country.
on technology to get out the gas, the basics are there. The big diff is the recognition that all plays are different and require different ways(what to target on drilling, how far to drill, how many fracs, how to execute the frac, etc.) most importantly, each shale play varies such that these change, sometimes dramatically across short distances. Service companies are now into SMART fraccing to get more geologic input real-time to get the best possible frac.
Technology can also locate a “sweet spot” in a formation. One can always get gas out of the ground(definition of a shale or resource play) but one wants to know where it is best or the best producers.
I think that is the real future for us. Get the very best results first, leave the poorer results for sometime later.
By the way, current gas prices will not support much in the way of gas drilling in any of the shales save those already well understood. Need much higher prices.