Executive viewpoint
As I reflect on what’s happening in the oil and gas industry today, I’m reminded of the saying, “the only constant is change.” There’s no denying that you need thick skin to endure the industry’s inherent cyclical nature. Historically, as the market recovers, we go back to work, having survived the correction to enjoy another couple of years of prosperity. The reality is that the market structure in which we operate has fundamentally changed since the peak of 2014. For manufacturing and service companies like Weir, we must consider how to not only survive in the new environment but contribute to the value chain that will allow North American shale to continue to win globally.
Multiple factors in play today are driving these structural changes, as we idle between $50–$60/bbl. One of the biggest dynamics is that the investment climate has followed the tech boom pattern. Tech investors poured capital into companies in anticipation of a future windfall, only to grow impatient and tighten purse strings, demanding those businesses generate cash.
The same has happened to independent operators in North America. Energy investors have restricted their investments, demanding operators live within cash budgets. With this financial pressure comes behaviors that have structurally changed our market. Without near-unlimited availability of capital, operators assume an oil price, budget their annual drilling program, and then proceed to drill, complete and start producing as soon as possible, then stop!
Unfortunately for manufacturing and service companies, this creates an environment of trying to support relatively short bursts of activity followed by “white space.” I never thought, as I developed annual budgets and five-year strategies, that I would yearn for the days of the “normal” cyclical nature of business I described in my opening comments. Until some fundamental change in global supply and demand occurs to sustain higher oil prices, we will operate in this environment.
The effects of tightening capital investment are compounded by environmental, social and political factors, as well as global economic uncertainty. In the past two years, Permian takeaway issues have been the talk of the town. While the Permian solution was already in process, the industry overlooked structural takeaway issues in Canada that are no closer to being solved today than yesterday. In Western Canada, oil and gas supply available to export continues to exceed pipeline capacity. Alberta’s production curtailments have made it difficult to see light at the end of the tunnel. The Trans Mountain Expansion pipeline project has a long way to go before it’s a reality. Would we ever have thought that we would look at Canada and be happy to only worry about “spring break-up?”
Further complicating visibility and sustained demand growth is global economic uncertainty, starring the U.S./China trade war and Brexit. Both need to be resolved before global liquids demand growth can get back to 1.5 MMbpd/year—a key component of sustainably higher prices.
So, has North American shale reached a steady state? Is this the new normal? With disciplined capital spending, negative investor sentiment, three-to-six-month cycles, technology and efficiency driving excess equipment capacity, and a crowded competitive landscape making once-differentiated capability now a commodity, the question is how do we operate and make money? I think we start with what we can control—and that is changes in operating models and the breadth of our technological solutions.
When you take a closer look, you see the progress and potential for efficiency improvements and how they are taking shape. The past few years have seen much progress in the entire drilling process. In fracing, stages per crew are up nearly 50% since 2014. We’re seeing an increase in pad/zipper fracs, equipment that is more reliable, and systems that require less “on location” maintenance and less people to increase stages fraced with less equipment. We are making great strides in efficiencies. However, more can be done.
When I look to the future with all these factors impacting our industry, it is clear that we must take a systems approach to technology development, to really move the needle. I’m not only asking my engineers and team, “how do we make the next pump better?” but also “how do we make the entire frac site better?” This requires manufacturers to focus on every touchpoint on the frac site instead of singular equipment advances. We’re determining how operators can reduce people and equipment onsite to reduce cost, improve safety and reduce the environmental footprint.
Historically, the operating model in North America for manufacturers and service companies has been buildings, machines, trucks, equipment and labor-intensive solutions. This requires a lot of capital investment that could be tolerated with slightly longer cycles. While workforce reductions are always painful, they were somewhat the norm in multi-year cycles. In our current environment, we are forced to look structurally at both our footprint and organizational structure. Large workforce fluctuations within months are unsustainable, as is feeding recoveries into large, fixed manufacturing monuments.
As I stated at the outset, the only thing constant is change. Cycles are shorter over the medium term, so our response may need to be different than before. We must be open to not only changing paradigms on our technology and solutions but also looking in the mirror at our own structure and how we deliver those solutions. So, the challenge is ours to continue to make this incredible evolving industry better for us all and continue to make North American shale globally competitive.
