By David Yager, January 5, 2017
Oilfield Service Management Consulting – Oil & Gas Writer – Energy Policy Analyst
Based entirely on higher oil and gas prices and the need for exploration and production (E&P) companies to replace reserves to stay in business, Canada’s oilpatch may get the opportunity to switch to offence from defense this year. It is already underway.
As E&Ps try to go back to work they are discovering their captive and extensive oilfield services (OFS) vendor base has not been patiently standing by waiting for the phone the ring. OFS has been bleeding buckets of cash and slashing everything necessary and more to keep their telephones connected. The biggest cost for OFS is labor and we all know what has happened there.
E&P has faced similar challenges, grappling with an oil price drop which in February 2016 saw WTI fetch only 25% of what it sold for in June 2014. Customers demanded the best prices possible and if suppliers went broke they didn’t care lest they face the same fate. Awful.
What this means is when both parties want to increase activity not all the tools formerly available will be there. Clients have folded, vendors went broke and thousands of skilled and experienced personnel have moved to another province or are doing something else. Even if oil prices spiked tomorrow getting this big machine up and running again will take time and money.
Coming out of the worst slump since the 1980s there is an opportunity to do business differently. In the spirit of New Years’ resolutions, here’s a few ideas. Let’s hope the commitment to improvement lasts longer than most year-end health club memberships.
Pay your vendors more & work together: What a concept!
The party is over for E&P companies convinced the lowest possible price is the surest path to success. OFS has been working at cash cost at best. When servicing billions of new capital investment aggressively encouraged by clients since 2010 is taken into consideration, OFS is losing enormous amounts of money. Wages have been cut, good people laid off, equipment cannibalized and credit lines exhausted. Those are the lucky ones. The rest went broke.
But the good news is when you pay more, you can ask for more. So instead of procurement based entirely on price, why not sit down with your key suppliers and talk about a new relationship. Ask your vendors, “If I pay you a higher margin so you become sufficiently profitable to be able to supply good equipment and service, what can you do to make my operation more efficient?” It is amazing how much OFS operators know about how to do the same job more cost-effectively. But nobody asks.
The greatest, but rarely-acknowledged advantage OFS has over E&P, is service and supply does just one thing very well for multiple clients. This means they are exposed to the best – and worst – practices of various customers. E&P has the role of being experts on engineering, purchasing and multiple vendor logistics. They’re good at this. Just ask them.
Talk to your suppliers. They will probably be terrified to tell you the truth until you’ve built some trust but after that you’ll be surprised at all the ideas they will put forward to help reduce the total cost of your operation.
Spending more often yields more
There are two Cardium oilwells within view out the front window of my house (I live on an acreage west of Calgary). They were drilled in the past three years by two unrelated operators. Because they are extended reach horizontals they share essentially the same surface location. But they couldn’t be more different.
Both tap the same zone. The biggest difference is the first one only produced for six months and has been shut in for some time. It would be accurately described as a dog, a darned expensive dog. I never saw a tank truck hauling away produced crude while the pumping system was still over the well (it was moved off some time ago). The lease is overgrown with weeds. When something might happen on this location is unknown.
The other well was drilled on an adjacent surface location. Seems odd for an operator to snuggle up to a well that has quit producing and drill anyway but that’s the way it goes when drilling for light, tight oil. It is not so much the reservoir as the wellbore construction and completion techniques. This well has been pumping away for over 1.5 years and the tank trucks come by regularly to haul crude to a pipeline terminal.
Because I’m curious and tend to ask these questions, I’m told the biggest difference between the two is the use of invert mud. The first well was not drilled with invert (it costs more) and apparently when it came time to case the horizontal section they could only stuff part of casing into the well. So when it was completed, only a fraction of the wellbore drilled was fracked and put on stream. The well produced accordingly. Woof! Woof!
The other well was drilled with invert and cased to full length. It cost more to drill it this way but in the end the operator yielded much more.
There may have been some other variations on the drilling and completion procedures besides the one cited above. But one is commercial and other not. Knowledge on how to succeed in the oil and gas business does not come with the mineral rights. Talk to your vendors.
Understand what your clients need and why
The fact oilfield service companies do one or a few things well is a blessing and a curse. The good news is they are very good at their one element of a project which is critical. That’s why they are there. The bad news is they often don’t understand or don’t even care where they fit into the great scheme of things. The singularity of focus by OFS means their primary function is to show up at the right place at the right time with the right stuff leading to an invoice and payment. Their secondary function, if they consider it at all, is why they were hired and where their goods or services fit into the entire process. Too many OFS operators don’t care. Just pay me.
Although unfortunately this will come as a surprise to way too many suppliers, the primary purpose of E&P companies is to find and profitably sell oil and gas, not make their vendors rich. In the absence of a true value proposition, price is all that matters. And what’s a value proposition? That’s where you understand what the client needs, why, and how you and your company are the best possible choice because you’re going to do more than sell, deliver and invoice.
There’s many ways to add value. On a straight rental of some piece of unmanned equipment ensure it is in good working order, delivery and pickup is timely and the invoice is completed expeditiously. All the requisite order numbers and field approvals are included and the invoice total accurate down the penny. This saves money on the job and in the back office.
With more complex services such as rigs, pressure pumping, drilling fluids and directional drilling, this is the time for discussions about best practices. If it costs more to provide good equipment and good people then explain how hiring you will reduce the total cost.
There has been a running joke for years about how dumb oil companies are in that they will pay for rental equipment they are not using because they have too many moving parts to pay attention. While this might have created a few easy bucks when times were frothy, the current pricing environment has proven the clients are not stupid. Get with the program. Add value. Or at least understand what that means. And if you don’t hire somebody who does.
Get involved in the political process and have a voice
Most oil industry folks aren’t involved in politics. There’s the usual lobby groups like CAPP, EPAC, PSAC, CAGC and CAODC to take of care of such things. For E&P and rigs, the majority of operators are represented through paying dues, joining the association board and collectively engaging in an ongoing dialogue with governments. CAGC does a pretty good job for the exploration sector considering how much it has shrunk. While PSAC does great work, the number of OFS companies that are PSAC members compared to how many exist should be embarrassing. Can’t find $1,000 a year for an associate membership for an organization whose sole purpose is your success? Maybe you should contribute something besides letting your competitors pay the freight on your behalf.
Historically, too many oil people who could make a difference haven’t bothered. After all, they’ve been doing God’s work. Creating jobs. Investing capital. Keeping the economy moving. Paying big taxes and royalties. What on earth more could you possibly ask of a successful E&P or OFS executive?
But there can’t be a time in recent history when the upstream oil and gas business was more political than today. It’s all politics. Saudi Arabia and Iran jockeying for control of the Middle East. Outgoing President Barack Obama denying construction of Keystone XL to please his environmental supporters. B.C. Premier Christy Clark’s “five conditions” to consider allowing filthy Alberta oil access to her province’s allegedly pristine Pacific coast line. Alberta Premier Rachel Notley’s massive reinvention of the oil business through carbon taxes, carbon caps and higher corporate tax rates. Prime Minister Justin Trudeau’s determination to introduce national carbon taxes, cancel pipelines (Northern Gateway) and postpone pipeline hearings (Energy East) as he sees fit.
What on earth has any of this got to the basic job of supplying cheap hydrocarbon fuel to consumers in a large cold country and in doing so paying billions in taxes and royalties? Nothing! But if you can’t beat ‘em, join ‘em.
The last two months have seen positive responses from Iran and Saudi Arabia as they to work together within OPEC to put a floor under oil prices. President-elect Donald Trump may change everything for oil and gas in the U.S. and it all appears positive.
The challenges close to home are in Ottawa, Victoria and Edmonton. But you get the impression that even the most pro-environment politicians in this country (adequately represented in all three capitals) are weary of the economic damage caused by the oil price collapse. Canada is the fifth largest hydrocarbon production jurisdiction in the world on the barrel of oil equivalent basis. You cannot have this business on its knees without affecting everything. They are all sounding different than they did a couple of years ago.
So, in 2017 more people in the ‘patch should get involved in the political process in some way. Find a few bucks and support the appropriate trade or industry association. Phone and ask for a meeting with your MLA or MP. Write a letter to a minister of something. There are leadership races underway in two pro-oil parties, the Conservative Party of Canada and the Progressive Conservative Association of Alberta. Support somebody who supports you.
The Wildrose Party in Alberta and the Saskatchewan Party are 100% pro-industry. No two political parties support oil and gas this unequivocally. Donate. Buy a membership. Help Liberal Premier Christie Clark. With an election set for this spring the opposition NDP is determined to stop Kinder Morgan if elected. This issue is already too complicated.
Get your hands dirty and do something. The risks of not doing so are too high.
About David Yager – Yager Management Ltd.
Based in Calgary, Alberta, David Yager is a former oilfield services executive and the principle of Yager Management Ltd. Yager Management provides management consultancy services to the oilfield services industry in a number of areas including M&A, Strategic Planning, Restructuring and Marketing. He has been writing about the upstream oil and gas industry and energy policy and issues since 1979.