Oil-Services Providers Ponder How to Survive Energy Bust

MOSCOW (Dow Jones Newswires), May 28, 2009

When oil-service providers met at the Offshore Technology Conference in Houston during the recent boom in energy, they were used to calling the shots. Now, caught between high operating costs and clients bent on reducing their own expenses, they're exploring strategies to survive the current economic crunch.

"All of us are starting to see an impact," said Thierry Pilenko, chief executive of oil-services provider Technip (TEC.FR), citing a downturn in services dedicated to petrochemical projects, onshore drilling and even deepwater activities.

Oil-service providers must find ways to lower costs by making changes to their own supply chains -- including profiting from cheaper materials and establishing new relationships with suppliers in Asian countries, Pilenko told attendants of the OTC conference. These companies must strive above all to avoid the mass layoffs that crippled the industry in past oil busts, he said.

But the downturn also presents an opportunity to do better engineering and increase operational efficiency. During the boom, "there was a need to go fast to bring the resources as quickly as possible," Pilenko said. "This is the opportunity today to look at simplification."

The service providers' dilemma underscores the boom-and-bust nature of the oil industry -- frenzied activity and high profits follow rising energy prices, while economic crises bring the machine to a crashing halt. The mass layoffs that followed the energy bust of the 1980s compounded the oil spike of the last few years, because there were not enough experienced workers to man all the needed projects. Top oil-services executives, who say that in the long-term energy prices are bound to rise, want to break the cycle.

"We need to guard against some of the behaviors that present themselves when times get tough," said Baker Hughes Inc. (BHI) Chief Executive Chad Deaton. Baker Hughes has had two rounds of layoffs this year.

Major Slowdown

At the Offshore Technology Conference, one of the oil-services industry's largest annual gatherings, attendance was down 10% from last year to an estimated 67,000 people.

The booth of Weatherford International Ltd. (WFT), a global oil services company, is two-thirds smaller than it was last year, according to a spokeswoman. "It's all about efficiency right now," she said.

Oil and gas companies, whose profits are pinched by low energy prices, are bent on reducing their service costs.

"We have been very quietly renegotiating contracts," said Matthias Bischel, a senior vice president with Royal Dutch Shell PLC (RDSA).

Bischel added, however, that the Anglo-Dutch company, which is maintaining its $30 billion annual capital budget, is working with providers to extend contracts or increase the amount of work in exchange for lower prices.

The global economic slowdown, which has brought down the cost of construction and materials such as steel and cement, should benefit those companies that still plan to maintain a high level of investments. For example, building FPSOs -- floating production storage and offloading systems, key to the development of deepwater fields in places like Brazil and the U.S. Gulf of Mexico -- could become cheaper and higher quality, said Candida Scott, a consultant with Cambridge Energy Research Associates.

"Productivity must increase just because we're not at limit capacity," Scott said.

(Jason Womack in Houston contributed to this story)  

Copyright (c) 2009 Dow Jones & Company, Inc.

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