In time, the Schlumberger/. Cameron and Baker/ Halliburton mergers should bear the closest resemblance to the beast the
30 D PA OL RT LAR 2O O F 2 IL:
INDUSTRY OUTLOOK: 30 DOLLAR OIL PART 2
BUILDING The new buying criteria A BEAST for 30 dollar oil
The oil and gas industry must also evolve in order to survive, much like pre-historic birds evolved to become the birds we see today.
In part two of his series, Andre Gafford from DeLeon Business Consulting Group dives into how manufacturers of pumps and PVF can adapt to a 30 dollar oil environment, along with the steps to take now in order to be ready for when the prices bounce back. By Andre Gafford, Sr. Partner, DeLeon Business Consul ng Group
Evolution: the process by which different kinds of living organisms are thought to have developed and diversified from earlier forms during the history of the earth. Take the dinosaurs, they were the biggest, most powerful creatures on the planet. Now, there have been many different stories of their demise, but most people say that there was a cataclysmic event that changed the earth. That change was so drastic and traumatic that the vast majority of dinosaurs were killed off. Those that did not die evolved over millions of years into the birds that we see today. Now let’s look a little closer to home. One day I found myself having the same discussion with my wife that I had overheard my father having with his friends
Pump Engineer, April 2016
when I was younger. My wife said, “They don’t make kids like they used to,” and immediately I thought back to my rebuttal to my father. I was not as eloquent as I hope I am now, so I chose not to argue the point with my father that day. This time, some 30 years later and armed with more knowledge and experience, I said to my wife, “They are made of the same stuff, they are just cooked differently.” I know, you are less than impressed, so was she. So, allow me to explain and let’s hope my elaboration can win me a couple points back. They are cooked differently, meaning our children are formed in an environment that is drastically different from the one that shaped us and even more different from the one that
produced our parents. If you took a 20-year old today and transported them 30-50 years in the past, they would struggle. Conversely, our parents and even some people from my generation struggle to keep up with the technology of today. In order to survive and thrive, we must do as the dinosaurs have done and change with the times. About now you are asking yourself what this has to do with pipes, valves, pumps, or anything else you would typically see in this publication. Well, let me tie it all together. In part one of this series, we talked about 30 dollar oil and what that drastic price drop meant to manufacturers of PVF and pumps. We discussed what drivers contributed to our present state and the effect that it is having on
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INDUSTRY OUTLOOK: 30 DOLLAR OIL ͵ PART 2 Catch up on Part 1!
Did you miss Part 1? You can read it online by using the following hashtag to search for the arƟcle on Facebook and TwiƩer.
Figure 1: In order to survive $30 oil, O&G operators must either reduce costs, increase production efficiency, revitalize known resources, or drill and cap.
the entire industry. In our second installment, we go deeper into how we can adapt to the current environment and what steps we can take so that when prices rebound we are able to thrive. First, let’s take a glimpse into the minds of O&G operators. I have gained a deep understanding of how they think by working with and for them for almost 20 years. Oil and gas companies, no matter upstream or midstream, have shifted priorities and changed their buying criteria. The attributes that made your companies attractive at $100 oil may not
be so beneficial at $30 oil. To survive this downturn, oil producers implement at least one of the following options: Reduce costs Increase production efficiency Revitalize known resources Drilling and capping/contango The cost reduction phase is in full swing with all operators. In October, Forbes Energy reported that O&G layoffs had reached 200,000 worldwide. That number reached 250,000 by December 2015 and there are more to come this year. Not only
have companies reduced staff, they are reducing rigs (Figure 2). The USA rig count is down to 541, which is down 817 rigs since this time last year. Increasing production efficiency is not a tactic that was brought about because of low oil prices, but it is one that is gaining momentum in a time when margins are razor thin. Plus or minus 60% of potential gains above the current yields of 30-35% could translate into several millions of new barrels and substantial reductions in operating cost. Any increase will put the operator in a better position to gain market share when the market returns. Another low cost option for acquiring oil would be to inject CO2 or other chemicals into the well to reinvigorate production. This method enables you to recover resources substantially cheaper than those of a new well. This is a method used in more mature wells that can bring in production, but with less overhead.
U.S. Rig Count 2011 | 2012 | 2013 | 2014 | 2015 | 2016 Data made available by Baker Hughes. Date
Total Rigs 2015
Total Rigs 2016 (Wk./Wk.)
Oil (Wk./Wk.)
Gas (Wk./Wk.)
Misc. (Wk./Wk.)
RaƟo(%) Oil/Gas/Misc.
02/12/2016
1,358
-30 541
-28 (439)
-2 (102)
0 (0)
81/19/0
02/05/2016
1,456
-48 571
-31 (467)
-17 (104)
0 (0)
81/19/0
01/29/2016
1,543
-18 619
-12 (498)
-6 (121)
0 (0)
80/20/0
01/22/2016
1,633
-13 637
-5 (510)
-8 (127)
0 (0)
80/20/0
01/15/2016
1,676
-14 650
-1 (515)
-13 (135)
0 (0)
79/21/0
01/08/2016
1,750
-34 664
-20 (516)
-14 (148)
0 (0)
77/23/0
Photo credit: Baker Hughes Figure 2: Companies are increasing production efficiency and reducing the number of rigs in order to save money.
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INDUSTRY OUTLOOK: 30 DOLLAR OIL PART 2 rock bottom bid, but it will require additional oversight to make sure it is of the required quality.
Figure 3: Low oil prices are predicted to persist well into 2017.
Contango is a term referring to a tactic that became popular in the last half of 2008. At that time, oil prices had dropped from an all-time high of $145 a barrel to less than $40. With the prices so low, many oil companies decided that instead of selling the crude at what was thought to be unreasonably low prices, they would store the crude for a time until the price bounced back. At that time, tankers were the preferred storage location. The 2016 version of this strategy has producers using the ground itself to hold the oil. Oil companies will drill the well but not complete them, essentially leaving inventory in the ground until the prices are more attractive. This and other means of slowing production allows oil companies to continue to keep some personnel employed during this difficult time. As I stated, most operators are using one or more of these methods to sustain themselves. All indices predict that this low-priced oil environment will persist into 2017. Unfortunately, manufacturers can’t wait until the market rebounds before positioning themselves to grab it off the rim. Manufacturers must start planning now. How do we plan? What will these companies be looking for? How should we as manufactures evolve? Many consultants, including myself, will talk about vertical integration, mergers and acquisitions, systems and process upgrades, partnerships, strategic contracting, and shifting production models. All of these options have merits
Pump Engineer, April 2016
and will make sense for some manufacturers, but it really depends on your present state: How much cash you have to invest, how spread out your resources are, and what system or process deficiencies your companies may have. There is no one-size-fits-all. Once you determine your weaknesses, you can make a plan to strengthen yourself. When oil was $100, the price of goods was not the number one driver for major O&G companies — it was quality and delivery. The faster I can get it out of the ground safely, the more money I can make. So, I’m not going to argue about the price for goods and services as long as they are in reason because otherwise, that is stepping over dollars to pick up pennies. In today’s environment, you will find that the priorities are quality and prices, then technology. Most of the time if you can provide something that is quality, low priced supply chain people know that it may take longer to arrive. It’s the supply chain triangle: good, cheap, fast. You can be good and you can be cheap, but you won’t be fast. Or, you can be fast and good, but you won’t be cheap. Finally, if you are fast and cheap, then more than likely you are not good. Supply chain people know this, lower than market bids don’t win projects with majors because they assume you are missing something or skipped something and it will not be of good quality. Smaller oil companies have different budgets and are tighter, so some consideration will be given to a
Ok, what else do they want? Well, they want it all, even though they know they can’t have it. O&G companies want a supplier with distribution like Amazon: with one to two-day delivery services. They want to place the order and turn around and see a truck with product pulling up to the dock. They want systems that are the same as their own, or something that can communicate with the SAP’s of the world, so that they can process orders faster and allow the system to reorder when it hits restocking levels. They also want contracts that keep both companies protected, puts them in a position to be the first call provider, and has verbiage for early payment discounts and bonuses in the strategic contracts because if I can get you your payment faster so that you can reinvest the funds, I should be able to keep a small portion of it. They want a company with not only the size and money to pull all of these things together, but the reputation and respect of the industry, because if anything does go wrong, they will have as much to lose as we do. I want products that never fail. I want one neck to choke on a job site, meaning I want a company that can provide a variety of services, so instead of having 15 different companies on site I have 5 or less that know how I operate and can execute that flawlessly. Now, ask me if such a company exists.
Figure 4: The supply chain triangle: good, cheap, fast.
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INDUSTRY OUTLOOK: 30 DOLLAR OIL PART 2 No! The world has not seen this type of five-headed, winged, fire breathing hell beast, nor should it. A beast such as this would be able to monopolize too many markets and would destroy economic competition, ultimately causing more problems than it solves. So what do we have now? At present, we have the NOV’s that were on the right path to service the market when they purchased Wilson and spun off DNOW. In time, the Schlumberger/ Cameron and Baker/ Halliburton mergers should bear the closest resemblance to the beast the industry has ever seen. They have new technology to make systems work more efficiently. They also have open-minded operators and manufacturers that are willing to renegotiate contracts to achieve mutually beneficial wins. Smaller companies have opportunities to become beastlike since big companies move slower than
small companies, and ramping up production when prices rise will takes time. Quality data plus creativity and fearlessness can produce some amazing results if you have the right people to execute the strategies and you
start now. The giant meteor has hit and it’s either re-evaluate your company and come up with a plan to evolve into the beast that meets the needs of today’s O&G’s, or become extinct. The decision is yours.
ABOUT THE AUTHOR: Andre Gafford Andre Gafford is a Sr. Partner for DeLeon Consul ng Group, based in Houston, Texas. He has extensive experience in organiza onal strategy. Gafford refined his skills while working for major O&G and energy companies for over a decade. Organiza on development, strategic planning, supply chain processes and procedures, as well as increasing opera onal efficiency while reducing overhead are his areas of concentra on. Andre provides clients with solu ons and best prac ces that he has amassed from companies such as Shell, Hess, Marathon Oil, BP, and others. His recent ac vi es include opera onal and project development for Statoil. He has also conducted training workshops interna onally for supply chain strategies and vendor management. A graduate of the University of Houston, Gafford is a speaker at industry func ons and has served as an authority on market trends to many financial service companies. A na ve Texan, he raises horses with his family, and also loves football and Andre Gafford, DeLeon Consul ng Group rodeos.
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