Dealing with the low oil price world
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Oil industry managers talk about the opportunities, challenges of contracting in Alaska in today’s cash-constrained environment
ALAN BAILEY Petroleum News
With a modern oil company dependent on a team of contracting businesses to provide the supplies and services critical to the operation of oil and gas field assets, coping with the challenges of the recent oil price downturn has required urgent action both by operating companies and by the contractors with which they engage.
On May 25 during the 50th anniversary conference of the Alaska Oil and Gas Association, some managers from companies operating in Alaska talked about how they have been working with the contracting community to address the low oil price situation.
Frank discussions Stan Golis, Cook Inlet operations manager for Hilcorp Alaska, said that immediately after the oil price collapsed his company had sat down with its contractors for frank discussions on how to make significant reductions in the cost structure of the services that the contractors provide.
“What I appreciated was that they were responsive,” Golis said. “They listened to us. We had an excellent dialogue back and forth and we understood each others’ perspectives.”
After making appropriate adjustments, Hilcorp continued to make money, even when the oil price dropped to $30, he said.
Larry Burgess, health, safety and environment manager for BlueCrest Operating Alaska, commented that in the days of $100 oil, the price of services and the cost of labor had become inflated. Now, with companies hungry for work, goods, services and materials are much cheaper than a few years ago - the cost of pipe, for example, has dropped by 70 percent, he said.
But Burgess also emphasized the importance of ensuring that contractors continue to have viable businesses.
“If they’re not making money, they’re not going to do a good job,” Burgess said. “They’ll take shortcuts, which results in injuries.”
New paradigm JP Connelly, regional director of Alaska procurement, BP Exploration (Alaska), sees the current situation as a new paradigm, with deeper and longer commodity price cycles and a corresponding need for a long-term approach to contracting. Connelly said that, with both the oil companies and the contractors needing to focus on cost reduction, a supplier needs to “leave the sales pitch out” and, instead, focus on negotiating transparently to find a deal that the businesses on both sides of the contract can live with. It is necessary for the contractor to be open about cost structures and cost buildups so that both businesses can help each other find efficiencies and gains.
“I think that ultimately this is about sustainability,” Connelly said.
“What I don’t want is someone just trying to sell me something and invoice me,” Golis said. “They need to understand my business. I’m looking for a long-term relationship.”
An understanding of the business and a willingness to innovate can lead to improved efficiency and cost reduction. But, although innovation is important, a contractor must address the service that has been requested, and not, for the sake of innovation, skip over into some other service offering, Connelly emphasized.
“You want to stick to the script and understand the work very deeply, and then work from there,” he said.
The new normal Golis said that in “the new normal” of the oil industry, the low cost producer is going to survive.
“We have to lower our cost structure longer term to be competitive,” Golis said. “We are competing against Saudi Arabia. We’re working very hard through our whole supply chain to drive those costs down.”
Dan Flodin, supply chain management director for Alyeska Pipeline Service Co., the operating company for the trans-Alaska pipeline, commented on the success that his company had seen in the first quarter of 2015, when working with the company’s largest service contractors to make new agreements that have since gone into effect to see the company through the difficult times of low oil prices. That was a rewarding process that worked very well, Flodin said.
And Connelly commented on the vital role that the contractors play.
“If we’re going to come out on the other side as a stronger company, it’s going to be in large part thanks to our suppliers,” he said.
Burgess also commented on the value of working with local Alaska contractors, who can respond quickly to changing needs or any issues that arise. The use of a local contractor had proved particularly successful during the construction of a man camp that BlueCrest required.
“I couldn’t ask for better performance from the contractor,” Burgess said.
The procurement process Despite the changing world of the oil industry, it appears that the essential procurement process for engaging contractors and the basic selection criteria for those contractors have changed little. However, several managers commented on the ever-increasing importance of safety and environmental performance in contractor selection. Burgess commented that a contractor has to exceed a specified level of proven safety performance to be considered a candidate for a BlueCrest contract.
Connelly commented on the dangers associated with the working environment in the oil industry and the effort and resources that need to go into ensuring safe operations.
“We look for suppliers that value safety as really part of what they do, as opposed to something else they just have to tick the box for,” Connelly said.
The absolute must haves for a contractor are experience, quality goods and, more importantly, the quality of the personnel, Burgess said.
“It doesn’t matter how good your material is or your equipment … if you’ve got someone out there who either doesn’t care or doesn’t understand the product, it’s a disaster,” he said.
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