So how is your company going to cut costs in the face of falling oil prices?
Is this a temporary blip on your radar screen or a new reality for oil and gas companies on both sides of the border?
| Date Published | February 19, 2015 |
| Company | Leadstone Group Inc., Oilfield HUB |
| Article Author | Kevin Turko |
| Article Type | February 2015 Issue |
| Category | Articles |
| Tags | Bid Requests, CEO Message, Cost-Cutting, Falling Oil Prices, Kevin Turko, Oilfield HUB, Operators, Preferred Vendors, SCM |
| HUB SEARCH | Leadstone |
So how is your company going to cut costs in the face of falling oil prices?
Is this a temporary blip on your radar screen or a new reality for oil and gas companies on both sides of the border?
This past month, I spent more than a few hours with executives and operations contacts from companies in our Oilfield HUB online business community asking them these very questions. Naturally, most of these conversations started out with sharing our personal opinions on demand versus production levels, what got us here, and always ended in a very lively debate as to how long it will take before prices might recover to more favourable levels.
This invariably also led to more solemn discussions on what each of these companies were contemplating from a cost-Âcutting perspective to capital budgets and operations for the remainder of this year, and perhaps beyond. No one really wanted to speculate beyond 2015 fiscal budgets, as there seems to be a universal belief or, perhaps better put, a heck of a lot of hope that oil prices would inch back up to
more sustainable levels as the year unfolds and, particularly into the early part of 2016.
Thankfully, several of these companies have worked closely with their bankers and had some prudent hedging strategies and programs in place for a major portion of their production volumes. So the immediacy and need for serious cost-Âcutting measures is still a few months away. Kind of a wait and see attitude, while they trepidatiously watch the world stage play out in front of us all over the coming months. But that said, costÂ-cutting is now front and center on everyone’s mind.
Slashing capital budgets, curtailing existing drilling programs, and potential staff/contractor reductions are all being contemplated or are already in motion. The next obvious cost-Âcutting focus then shifts to the service and supply companies who exploration and production companies rely upon for the lion’s share of their field operations. We have already heard some operators are taking an across the board approach with all of their preferred vendors. They are demanding each supplier cut their prices either by a defined or imposed percentage, or requesting an immediate response with a revised pricing structure for future projects or as part of an existing managed services agreement.
Preferred vendors realize they may have to cut their prices in this new or temporary reality, so the bidding process take on a heightened level importance in each and every deal.
The across the board approach is a quick and easy tactic from the operators standpoint but is often met with mixed results by their preferred vendor community. Some suppliers capitulate immediately and agree to reduced prices, others are dragged along disgruntledly as previous quoted prices were felt to be more than competitive, while others simply walk away from the business as profit margins are too thin, or even nonÂexistent, at the price levels being sought. In each case, relationships are strained and future business dealings are placed in jeopardy.
Other operators are taking the bid request approach for all future service, supply, and rental requirements as a means to ensure they are getting the best possible deal from all of their preferred vendors, and in particular, their longÂ-time go-Âto vendors in each of the major product and service categories. The cost-Âcutting ball is tossed over to their list of preferred vendors and potential new suppliers through bid requests and sourcing inquiries before orders are awarded to the successful bidder.
This is viewed as a far less obtrusive approach by the service sector, as the ‘may the best man win’ mentality tends to come to the forefront in everyone’s mind. Preferred vendors realize they may have to cut their prices in this new or
temporary reality, so the bidding process takes on a heightened level of importance in each and every deal. At least in this scenario, the decision is squarely in their camp as to what prices should be quoted for the new or additional business. No one likes the idea of bidding on business with existing customers, but then again, no one likes $45 oil either!
Trouble is, the way the industry works at higher oil prices comes back to haunt everyone when free falling oil or gas commodity prices hit the markets. When prices are high, activity is rampant, and capital budgets are flowing. Many operators just don’t take the time to constantly, or even occasionally, validate the reasonableness of the quoted prices for their services, supplies, and rentals. How often do you hear an operator say, “This is the guy we’ve always used,†or “This is the company that does all of our xxx work.†Not saying this is totally a bad thing, but when there are very few, or no, checks and balances in place to ensure prices are competitive, then resulting costs perhaps need to be challenged irrespective of the current price of oil.
Many operators are simply not equipped, nor have the systems in place to function in this fashion. Either in good times or bad! Yet we are seeing more and more operators of every size adopting more aggressive supply chain policies and procurement procedures. Core to these new initiatives are bidding processes and tools like Oilfield HUB, which require little to no additional overhead to easily make this happen.
Everyone’s hand is being forced in this new reality. Regardless of the cost-cutting approaches you decide to adopt, at minimum, you should consider how an ongoing program of issuing bid requests and better managing your supply chain, can go a long way to improving your cost efficiencies and bottom line!
Kevin Turko
CEO
Leadstone Group
403.537.6561
 This article originally appeared in the Â