Kemp: Operational Excellence Becomes Oil Industry Watchword (Again)

Unlike the previous downturn, which was associated with a drop in demand many considered temporary, the current drop in prices is the result of the supply side shale revolution that most expect to lower prices for at least several years.

Cycle of Cost Control

The cost of finding and developing new oil fields (covering everything from leases and seismic surveys to hire rates for rigs and pressure pumping equipment) has always been strongly correlated with oil prices.

In boom years, the race to develop new resources causes the industry to lose control over the cost of everything from roustabout wages and drill pipe to consumables like fracking sand and drilling mud.

When the bust arrives, surplus rigs are idled, field workers dismissed and field developers renegotiate the costs of everything with their contractors.

The industry has experienced busts before in the 1960s and 1980s when the number of rigs drilling for oil and gas in the United States fell by more than 50 percent.

The current downturn is no different with developers and operators looking to cut costs which had become inflated during the 2004-2014 boom.

"We all get a little lazy, a little flabby," the chief financial officer of drilling contractor Transocean admitted at a conference recently about the impact of years when oil prices were above $110 per barrel.