First oil

The title might lead you to think that this column is about race relations. With growing ethnic tensions and racial intolerance throughout the world, an article about co-existence would certainly be appropriate in a mainstream journal. However, this discussion is about the fraying relationships between oil and gas operators, service companies and equipment manufacturers.

Tension in the locker room. When an athletic team is on a winning streak, there is great comaraderie in the locker room. Compliments about team play are exchanged in a positive atmosphere. However, if a losing streak sets in, the atmosphere changes quickly. After about five years on a winning streak, the oil and gas industry is now on a depressing losing streak. As a consequence, operators and their contractors and service companies are often at loggerheads about how to work together, to achieve profitable results in a sustained, low-price environment.

Cutbacks and layoffs. During boom times, operators typically experience rising costs from their vendors. As the U.S. rig count climbed past 1,800 in early 2014, the demand for directional drilling services and multi-stage fracing rose dramatically, leading to a tight allocation of resources and rising prices. As crude oil prices crashed after mid-2014, operators, particularly independents in the shale plays, have achieved significant reductions in E&P costs. A leading cost-cutting strategy was forcing the vendors to discount their products and services. In the beginning, the vendors accepted their lot as an unpleasant, but necessary way of keeping their crews working. Lately, however, some vendors have chosen to walk away from unprofitable jobs.

There also has been a trickle-down effect of layoffs among the operator staffs. At a recent conference of the International Association of Directional Drilling (IADD), one Eagle Ford operator mentioned that he had dropped directional drilling services from a vendor and chosen, instead, to retain several of his drilling superintendents by making them work on rigs as directional drillers.

Whose technology is it? The operating efficiencies that the oil companies have achieved are often the result of technology improvements and best practices introduced by the drilling contractors and service providers. Since the 1990s, operators have reduced their R&D expenditures and chosen, instead, to depend on technology innovations that have come from their vendors. Unless there is an incentive plan in place, based on efficiency improvements, the vendors may be in a better position to win project awards, but they do not see a direct financial gain. In fact, if a contractor is paid on a day rate, a reduction in drilling or fracing days is actually to his monetary detriment.

Day rate or incentive plan? At the IADD conference, there was an extended discussion of whether there should be a change in how contractors and service providers are paid. Under a day-rate plan, the contractor gets paid on the basis of the negotiated day rate. While the company man can press the rig-site crew to work faster, the contractor has no such incentive. Some of the vendors have complained that the operators try to achieve drilling efficiency by running the rig and drilling equipment at or above their specified ratings.

If an operator switches from a day rate to an incentive plan, then both sides are on the same page. However, the risks associated with formation challenges and nonproductive time (NPT) fall on the shoulders of the vendors. An incentive plan is not likely to work in a wildcat setting, due to unknown conditions, but it could work in a factory drilling and fracing environment.

In the same leaky boat. To achieve the best results, it is important for all parties to recognize that we’re all in this together. When crude oil was above $80/bbl, everyone was profitable. Now, we need to realize that we’re all in one, leaky boat together. Everyone needs to be profitable and survive this drastic downturn together. The oil and gas magazines are also hunched up in this lifeboat. So, don’t cut back drastically on your advertising budget!  

About the Authors

Pramod Kulkarni

World Oil

Pramod Kulkarni pramod.kulkarni@worldoil.com