The Squeeze is On
The oil industry is noted for long-term projects that can take years – sometimes more than a decade – to move from discovery to production. Here in our own backyard, we watched as Hydro used 10 years to go from discovery to production on the giant Ormen Lange field. A decade isn’t so long when you consider that the still-on-the-drawing-board Shtokman field on the Russian side of the Barents Sea was discovered in 1988.

The oil industry has well-deserved reputation of being cautious, taking the long-term view, relying on tried-and-true technologies (all the while tinkering with innovation). But oil companies are businesses, and as businesses, report quarterly to shareholders, whose expectations are for ever increasing positive results.

So the oil industry operates in a dual system – long-term projects versus short-term market forces. And operators, feeling the squeeze resulting from the recent oil-price free-fall, have looked to the oilfield service companies in their efforts to lower costs.

Late last fall, as the International Energy Agency was releasing its annual World Energy Outlook here in Oslo, Helge Lund, StatoilHydro CEO – while pointing to steel and rig costs that have soared 250 percent and 400 percent during the previous five years of intense growth – spoke of an impending “cost tsunami” that faced operators as a result of the price plunge that followed last summer’s oil-price spike.

So oil companies, feeling themselves squeezed by the cost of doing business, turn to the service companies for relief. And suppliers feel the pressure from above as the oil companies push for lower prices. But, as Helge Lund pointed out, demand for materials such as steel mean that the supply industry faces its own problems from the other side of the supply chain.

StatoilHydro, in late December, due to high rig rates, terminated its procurement rig-hire process for operations on the Norwegian Continental Shelf. At that time, the price for a barrel of oil had dropped 60% from mid year, while rig rates held steady.

And StatoilHydro is not alone. On this side of the Atlantic, BP, Total, and Shell have also begun to ask suppliers to cut costs.

The worst hit may be the newcomers, whether oil companies or suppliers, who don’t have the deepest pockets and are therefore much more vulnerable to oil-price fluctuations. Without ready access to capital, smaller companies will find it increasing difficult to stay afloat, resulting in bankruptcy, takeovers or investor revolt.

Offshore drilling rigs have been a good example of how the damper on growth has played out. Newbuilds by companies that could afford pay up front have moved forward, while those who have relied primarily on credit have foundered.

A quick look at Baker Hughes monthly rig count reveals that the overall numbers are down. So far, the numbers for offshore rigs has not changed dramatically. But this may change if more and more companies decide to stand on the sidelines rather than go forward with drilling campaigns.

Looking to that same IEA World Energy Outlook mentioned above, we find that increased oil demand is inevitable. Although growth in demand may be slow, it will none the less grow. As the industry has learned by experience, this is a time for looking to the long-term prospects.

One thing is for certain – although demand may be slightly lower now, as the world’s economy once again begins to grow, energy needs will increase. Add to that the inevitable decline of production from existing fields and the fact that we’ve pretty much run out of “easy oil”, so within the coming decade, we can expect the price per barrel to increase.

Whether we see a steady rise or a quick spike depends much on what happens now.