Our industry is once again dealing with the tough side of the boom and bust cycle. Head counts have been reduced, budgets cut and new project approvals have all but dried up. But for many E&P companies, the stall on new investments began even before oil prices fell as an overloaded supply chain led to soaring costs. It’s been a busy time for many dealing with the crisis but could it be time to look again at projects that were relegated in better times?
A lot has happened in the industry these last two years with dramatic changes in oil and gas companies with hatches battened down, staff cut and spending slashed. Analysts estimate the global industry has removed around $1 trillion from capital budgets to the end of this decade compared to original plans and the impact is already felt with a 75% reduction in the annual number of new large scale project approvals.
But the dire straits of E&P companies may have distracted them from the equally challenging condition of their supply chain partners whose response to a major shift in oil prices typically comes a year or two later. Here, capacity has been idled, charge out rates slammed and older, less efficient equipment sent to be either moth-balled or decommissioned. Many operators have either lost track of these developments or have lost the key people, through natural attrition or lay-offs, whose job it was to be plugged into these markets.
Now is the right time to look again at projects that were shelved in the run-up to the last oil price peak using refreshed data from the market and not the old assumptions contained in pre-existing spreadsheets and cost estimation tools. A good example of the fundamentally different environment is a recent major project at imminent sanction that saw its development capital cost estimate fall by over 30% primarily through using the most up to date data obtained directly from the market. A previously marginal project was back in sanction territory.
Not only are costs likely to be very different but with slack capacity, the supply chain will be more able, and willing, to look at more innovative ways of engagement that could also help get formerly marginal projects moving in a way that can create value for both parties. A range of approaches could be considered depending on the particular characteristics of the project. Examples such as discounted cost based contracting, deferred contractor funding, creative derivations on alliancing models with a different approach to sharing risks and rewards could be key to unlocking value for both parties along with the changed cost environment. Win-win solutions can be found in the less frenzied environment that exists now with the right mind-set, focus and determination.
Finances may still be tight but by its very nature oil and gas businesses must add new reserves or they will produce themselves into extinction. The supply chain has significant capacity and costs have come down appreciably so there is a great opportunity to get formerly uneconomic projects moving while those conditions last. Innovative ways of engagement between the oil and gas companies and the supply chain can create value for both parties and both this and a true refresh of old cost estimates can be the start of the recovery process and bring some relegated projects back into the Premier League.