Oil service firms are cannon fodder in the war on costs

Author Ben Winkley

There was a certain synchronicity about French service firm Technip’s cost restructuring plans coming out this week – a week that could be a pivotal moment for the oil service industry, containing clues as to how it got in such a bind and where it might go to from here.

There was a certain synchronicity about French service firm Technip’s cost restructuring plans coming out this week – a week that could be a pivotal moment for the oil service industry, containing clues as to how it got in such a bind and where it might go to from here.

The lower oil price has forced the industry into a war on costs. And in this war, where BP chief executive Bob Dudley expects costs in the industry generally to come down by 30pc, oil service companies are cannon fodder.

Technip will cut 6,000 jobs – around 15pc of its total workforce – as part of a plan to take out €830mn ($920mn) in costs in anticipation of a "severe and lasting downturn" in the oil and gas industry. As if to hammer home the point, the announcement came as Brent suffered its fiercest single-day decline since 27 November, as the actions of governments in Athens and Beijing caused uncertainty about demand and the possibility of a deal with Iran edged closer, raising the prospect of yet more supply in a market already awash with crude.

Technip said the lower oil price environment has had a significant impact on customers, with new projects being shelved and priorities reviewed in a context of permanently changing prices. The company said it has seen “irrational behaviour” — read: aggressive bidding among competitors.

This suits the producers. Total chief executive Patrick Pouyanne, speaking at the Opec International Seminar in Vienna on 3-4 June, said return on average capital employed when crude was $100/bl was the same level — around 11pc — as it was when crude was $20/bl in 2000. Unsustainable, he said. “We invest based on margins, not on prices," Pouyanne said. “We need to make projects simpler, make them more effective in terms of design.”

Certainly, fewer projects are getting the green light. Shell’s final investment decision on the Appomattox deepwater development project in the US Gulf of Mexico was a rare event this year. Norway's state-controlled Statoil made a final investment decision of its own on the giant Johan Sverdrup in February, and is now dispensing contractual largesse. But Sverdrup is a one-off, a ‘black swan’ event, and may be concentrating activity rather than expanding it. The project’s partners — Swedish independent Lundin Petroleum, Norway's Det Norske, Denmark's Maersk Oil and Norwegian state-owned oil and gas holding company Petoro — are unlikely to be concentrating on much else for the next couple of years.

And so Technip is just the latest in its sector to trim its cloth accordingly. Schlumberger is cutting 20,000 jobs, Halliburton 9,000, Baker Hughes 10,500 and Weatherford 8,000 jobs. Wood Group has said upstream activity remains subdued as lower oil prices squeeze project economics.

But one part of the oil price’s pull back this week could be a saviour for the service sector. If a deal is struck with Iran in Vienna — and the runes are still reading positive, despite deadlines coming and going — then repairing the country’s sanctions-battered oil and gas industry to a level where Tehran’s ambitious output targets can be met could provide a bonanza.

That point is some way off, though. Technip and its competitors will hope that actions taken already will place them in a good place when and if the market turns.

For more information, please contact OilBlog@argusmedia.com

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