According to Sir Isaac Newton’s third law of motion, “For every action there is an equal and opposite reaction.” After listening to various oil company presentations, there are clearly results emerging from their determined reaction to the extended crude price downturn.
Eni’s CEO Claudio Descalzi highlighted this dilemma as occurring during a period in which the oil price has fallen 70% since second-half 2014, but with costs not falling by nearly as much. “The industry needs to face this very complex challenge—to reduce costs to fulfill short-term financial targets without destroying long-term value,” he said.
With continued uncertainty over any likely price recovery, Descalzi acknowledged the industry has cut capex by more than 35%, mostly by postponing or canceling projects. “But this is a short-term solution,” he said. “It’s not viable for the long run because it will impact long-term growth and asset values. The only solution to reconcile long- and short-term goals is to rapidly align costs and prices in order to continue to profitably invest also when the oil price is low.”
Eni is doing this, and its percentages are pretty representative of operators as a whole. It started renegotiating contracts mid-2014 and last year achieved savings of 500 million Euros (US $570 million), a combined savings of 18% on roughly 2,000 contracts from renegotiation and tenders.
It intends to accelerate this cost-trimming renegotiation process, even bringing tenders forward. The 2016 plan is to renegotiate 1,600 service contracts. This “strict attention” to the supply chain, as Eni terms it, has lowered the average breakeven of the company’s upstream projects from $45/bbl to $27/bbl ($15/bbl for onshore, circa $30/bbl for shallow and deep water).
Statoil is doing likewise, having renegotiated about 500 contracts since 2014, CEO Eldar Saetre said. Its own portfolio breakeven cost has dropped to less than $50/bbl, with some projects under $30/bbl.
Any new activity after the vacuum left by 2015’s brutal projects massacre is encouraging.
But Saetre also added that Statoil is making changes to its operating model “to make sure that the current improvement sticks and that we don’t repeat the mistakes of the past.” Other CEOs also used the same terminology.
Unfortunately the “past” referred to contains an industry with a track record of overreacting at times of crisis by cutting too deeply into its supply chain and then suffering the consequences as that cash-starved chain itself almost unavoidably reacts in equal and opposite measure when better times return.
Sir Isaac would only say he told us so.
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