Big Oil Firms Crack The Whip Over Service Companies

Article title
On a mission to crush costs, global oil firms are rewriting the rule book on how they deal with service companies.


OSLO, March 26 (Reuters) - On a mission to crush costs, global oil firms are rewriting the rule book on how they deal with service companies.

Energy companies have sharply cut spending plans after a decade of double-digit growth, saving cash for dividends as stagnating oil prices and cost increase on mega projects worldwide have squeezed margins and angered shareholders.

Some now ask service firms to come into projects at the start, ditch some tailor-made designs in favour of standardised solutions and stay with projects longer to reduce the number of contractors involved, moves that reduce costs but favour bigger, integrated firms.

Oil service shares have suffered over the past year, with European firms hit the most. Analysts at UBS estimate they trade at 14 percent discount to their 5-year average with a further downside risk as investors adjust to a lower growth scenario.

"It is evident that the problem is not the services making supernormal returns but rather, given the persistence of execution issues, that something in the contracting model needs to change," UBS said.

"Now is the time of integration, with one service company doing everything with the client from planning the well to building it," Torjer Halle, the chairman of Schlumberger's Norwegian unit said. "Size matters and (integration) will happen in the industry."

A big extra cost has been that oil companies have built up redundant competencies with costly control systems since BP's 2010 Macondo accident in the Gulf of Mexico, especially for expensive engineering.


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Reid V. Williams | Apr. 29, 2014
I totally agree with Ben Lehr. I too have 35 plus years in the O&G Industry worldwide. I was last in Kuwait where a big French Integrated Service Company had a sweet master contract with KOC. They priced items out of sight and KOC didnt say a thing. This ISC MC gave the service company cart blanc to charge whatever, to put inexperienced personnel in place and equipment that rarely worked the first time. Without completion there is a lack of incentive to make positive change. I will never consult with KOC again. .

Ben Lehr | Apr. 5, 2014
On integrated services. It does not work, it breeds inexperienced personnel at the well site with very little support from office managers. It is costly and inefficient as the personnel know that they have a contract and they are backed by the service company. The integrated service company will never take accountability for anything, believe me they will try to pass the buck on everything. I work in a project in Central Africa where we have integrated services and|I can tell you with having over 40 years of oil & gas experience from the wellhead to corporate office I have never seen such a disorganized inexperienced and costly operation in my entire career. In my opinion stay away from integrated services and keep the competition at the wellhead.


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