Oil price rout has CEOs courting accountants not wildcatters

23 Apr7:57 AM

[CHICAGO] As the energy industry grapples with the worst price slump in a generation, oil executives are touting their accounting savvy over wildcatting skills.

In the days of US$100-a-barrel oil, producers were in discovery mode, searching for new oil fields that could swell the future value of their companies. Now, after a 48 per cent slide in oil prices, chief executives are focused on more conservative investment decisions, downsizing their workforces and making spending cuts needed to protect dividend payouts and corporate balance sheets.

The challenge: how to reduce costs without compromising the company's future competitive position?

The industry is under "new pressures that will create increased discipline and focus," said Exxon Mobil Corp Chairman and Chief Executive Officer Rex Tillerson at the IHS CERAWeek conference in Houston on Tuesday. Lower prices "will require us to work together as we have never worked together before."

The collapse in crude prices has been so dramatic that most of the 200 major international oil and natural gas projects scheduled for final investment approvals in the next two years are vulnerable to cancellation or postponement, said Nick Lowes, vice president of oil and gas consulting at IHS Inc. Sixty-six per cent of those projects aren't economical at current prices, he said.

Cutbacks have to be "about improving efficiency," Eldar Saetre, the CEO of Norwegian-based Statoil ASA, said in an interview. Too many cuts in technology development and exploration will hurt a company in the longterm, Saetre said. "We're not doing that."

"I've tuned it, I've tightened it," he said of his budget. "But we continue to invest in good projects and good exploration. Where I would really like to make a difference is on the more structural cost changes," he said.

Italian explorer Eni SpA plans to continue searching in Africa, Indonesia and other regions for oil and gas, even after cutting its 2015 spending plan by 17 per cent, CEO Claudio Descalzi said at the IHS event on Wednesday. To do otherwise would leave the company unable to take full advantage of the eventual recovery in demand and prices, he said.

Several major oil companies and US shale producers have relatively new executives who find themselves managing their first down cycle in the top job. Those include ConocoPhillips's Ryan Lance, Statoil's Saetre, EOG Resources Inc.'s William Thomas and Royal Dutch Shell Plc's Ben van Beurden.

"More than anything, they've got to do more with less," said Carol SingletonSlade, who heads the global energy practice for executive search firm Egon Zehnder International Inc.

Explorers that cut unwisely today will fall further behind once the market recovers, Kamil Zakirov, CEO of Moscow-based Targin Oilfield Services, said in an interview.

"That means when tomorrow comes and life is better, your competitor who managed not to cut is going to be ahead of you because he will have better educated people, higher qualification of them and new technologies," Mr Zakirov said.

Brent crude, the European benchmark, rose 79 cents to US$62.87 a barrel at 4:27 p.m. local time on the London-based ICE Futures Europe exchange. Crude has plunged 46 per cent since its June peak.

For Total SA CEO Patrick Pouyanne, reducing design intricacies is already paying dividends. Europe's third-largest oil company by market value cut about US$1.7 billion from the cost of a US$15 billion development in Angola by scrapping an early design and simplifying the schematics, he said.

It's important to "make a good enough design and to not make things too complex," Mr Pouyanne said during the IHS conference on Tuesday.

Explorers who already had strict financial controls and fat bank accounts prior to the slump will fare the best in the downturn, said Exxon's Tillerson. Even those companies are challenged by the need to maintain that strong financial position with relatively low prices that many executives, including Tillerson, believe will last for years.

Oil executives are using a combination of strategies to get their budgets in line with lower crude prices. Some are emphasising partnerships and collaboration to spread risk and speed innovation. Many are emphasising the role technology will play in finding new ways to do the same job more cheaply, such as using the industrial equivalent of baby monitors to remotely oversee remote oilfield stations.

In one sense, CEOs of US shale producers have an advantage over the bigger international companies, said Trent Aulbaugh, who heads Egon Zehnder's energy-focused Houston office. Shale producers already had been transitioning into a "manufacturing mode" as they sought to make the most of their oil assets, reducing costs and figuring out how to work more cheaply. The downturn just takes those skills "to a whole new level," he said.

At Devon Energy Corp, one cost-cutting measure has included automating oil and gas fields so that operators in a central command center can monitor every well, CEO John Richels said on Monday at an Independent Petroleum Association of America conference in New York. Crews can be dispatched to a well only when needed, rather than for routine checks.

Also coming under fire from eagle-eyed accountants are needlessly elaborate production facility blueprints, redundancies and over-designed equipment that were allowed to flourish in a US$100-a-barrel world, said Mario Azar, chief of Siemens AG's oil, gas and marine business.

Loose purse-strings and a desire to keep scarce, expensive engineers happy led some oil explorers to embark on "silly projects" that can't make profits with international prices that have averaged below US$56 this year, said Douglas Meikle, president of Cameron International Corp's valves division. Those extravagances are now on the cutting board.

Oil producers are axing "the wish lists of engineers that have gotten into the design without anyone asking why," Mr Azar said during remarks at the IHS CERAWeek conference in Houston on Tuesday.

One of the toughest challenges oilfield gear manufacturers like Cameron have faced as prices sank and budgets shrank has been convincing crude producers to tone down design quirks and use off-the-shelf equipment when possible, Mr Meikle said.

Oil companies need to instill "the discipline to quit engineering something when it's good enough," Mr Meikle said during the IHS event.

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