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 costs 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.
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 chief executive of Swedish oil firm Lundin Petroleum, said yesterday.
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 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.”
Statoil, last year’s most successful offshore explorer, has already taken a leap in cutting costs.
It told Aker Solutions to reduce engineering costs by up to 30% in the initial phase of its Johan Sverdrup oilfield.
To get that kind of saving, Aker Solutions has to get involved earlier than in past projects, combine work with another field and reuse design elements from past projects – instead of starting from scratch, chief financial officer Leif Borge said.
Earlier this week Schlumberger, one of the biggest players in the sector, said it was taking business away from rivals and that its first quarter was better than it projected.