November 2015

Energy issues

A reason to smile
William J. Pike / World Oil

Of late, I swear off reading the newspaper almost daily. But, then I do it anyway. And, then I swear off it again, because the oil and gas industry news is so depressing. Recently, for example, the Houston Chronicle ran articles titled as follows: “BP cuts $10B as oil woes linger,” “Anadarko posts $2.2 billion loss as oil prices sag,” “Nabors reports loss, sees more cost cuts,” “Sublease space doubles in the year since crude oil glut.” And that is just one day’s headlines, albeit in a major oil city.

Looking further afield, you find headlines, such as “Shale-rich Oklahoma expecting budget squeeze,” which leads into an article about Governor Mary Fallin’s calls for cuts in non-essential spending, as state coffers see dwindling revenue from oil and gas (UPI). If you read the Aberdeen Press and Journal or Alberta’s Calgary Herald, you will find the same depressing news, including one of the latest major headlines: “New budget features record $6.1-billion deficit, greater borrowing,” referring to the impact of low oil and gas revenues on the region’s tax income.

Or perhaps you have seen, as I did, Swift Worldwide Resources’ recent report of crucial numbers for the oil and gas industry:

  • 200,200—total oil related jobs lost worldwide, projections going forward of 250,000
  • 10,000—contractors laid off in the U.S. and beyond, but not listed in any company announcements
  • 25% to 35%—estimated staff cutbacks at major oil and gas operators (including early retirements), most of which have not been made public

Other figures are equally distressing. The Baker Hughes rig count found 32 rigs working in the Gulf of Mexico as of mid-October, down from 51 working rigs in October 2014, a drop of nearly 40%. Or perhaps you noticed that the major oil and gas companies, and their little brothers, have cut capital spending budgets to the bone because of plummeting revenues. Chevron, for example, went from a U.S. upstream profit of $1.05 billion in the second quarter last year to a loss of $1.04 billion in the second quarter of this year. Chevron’s third-quarter upstream performance showed a mere U.S. loss of $603 million. Yet, E&P earnings elsewhere were remarkably strong enough to net a total global profit of $59 million.

Royal Dutch Shell did not suffer as badly as Chevron, but theirs, too, was a story of declining revenues. Adjusted earnings for the second quarter were $3.8 billion, compared with $6.1 billion in the same period in 2014. Most of that decline was in the company’s oil and gas sector, which slid to $1 billion in earnings in the second quarter of 2015, compared to $4.7 billion a year earlier. As a result, the company has lowered its 2015 capital investment to $30 billion, a $7-billion drop from last year.

ConocoPhillips had similar performance. Second quarter revenue fell from $2 billion in 2014, to $81 million in 2015. The company started the year with an anticipated 2015 capex of $16.5 billion. By the second quarter of 2015, that figure had fallen to $11 billion.

Depressed yet? Relax. As bad as things are, there are bright spots—maybe not many, but we need something to smile about:

  • Crew quality for those rigs still working will probably improve. The stacking of tons of rigs has left a large pool of experienced crew members looking for work at any level. So if you need to upgrade your crews, now is the time.
  • In general, accident rates are falling as low oil prices impinge on activity levels. The total recordable accident rate in U.S. land drilling operations in the second quarter of this year was 1.27. Last year it was 1.54. Recordable accidents for U.S. offshore drilling were 0.64 last year but 0.55 in the second quarter of this year. While these declines do not occur globally across the board, they are in a solid majority.
  • The slowdown is also an excellent time to work on the rig fleet. Take advantage of the idle time to complete mandatory maintenance and inspections, without taking the units out of service and off dayrates. The same should be true of upgrades, if owners can afford them in the current climate.
  • To a man, all equipment owners are working to cut costs. Wages have been negotiated downward, equipment fine-tuned to save money and personnel, and management trimmed to minimums required for safe and efficient operation. If owners can resist the tendency to abandon prudence in relation to costs in the next up-cycle, the benefit to the bottom line might be substantial.
  • One thing that we count on as a positive in a downturn is the elimination of “tired iron.” While it may not be pleasant to contemplate, a boom cycle demands that every piece of equipment, regardless of its suitability or condition, be brought into the fray. Much of that equipment is inefficient, especially as technology progresses, and some of it is just plain dangerous, with regard to the tasks at hand. In the oil and gas industry, a good deal of that equipment is eliminated in a downturn. I, for one, think that is a big win.

These positives won’t come close to eliminating the pain, but they may provide a modicum of hope in a bleak climate.

Once again speaking of headlines, the newspaper also featured an article on a recently released study by the World Health Organization that identified bacon, sausage, ham and other processed meats as carcinogenic. I want to be in the mess hall the first time an offshore cook tells the crew that they can’t have bacon or sausage for breakfast, because of health concerns. wo-box_blue.gif 

About the Authors
William J. Pike
World Oil
William J. Pike has 47 years’ experience in the upstream oil and gas industry, and serves as Chairman of the World Oil Editorial Advisory Board.
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