It’s time to innovate and evolve says McCallum
James McCallum, chief executive at energy services company LR Senergy, a part of Lloyd’s Register Group, believes this is a defining moment for the energy industry. He tells Petroleum Economist why
As the oil price hovers around $65 a barrel, we are embarking on a crucial period that will define the industry’s future. Spiralling exploration and production costs are price differentiating energy plays and it is clear the current cost base cannot be sustained.
Standard business practice by the oil companies in a commodity price collapse is to firstly cut contractors, followed by a review of internal resources and restructuring to cope with the major loss in revenue. The job losses this time have happened much more quickly than in previous downturns. With financial reporting now every quarter rather than on an annual basis, the necessary adjustments have had to be made promptly in response to the markets.
The current environment is very much like a severe stress test to determine which companies have their financial and operations in order. Those that spent too much to lease equipment and plant to drill, or have high operating costs, are suffering most. While costs across the supply chain have risen dramatically as the pressure to meet increasing energy demands fuelled by short-term geopolitics and increased cross-sector competitiveness have ballooned, industry has not truly recognised the long-term implications of a spiralling market.
Prices are already being cut to retain customers. Like many in the supply chain, at LR Senergy, our margins haven’t changed but the cost of assets, materials and people have significantly increased. There has to be a level of adjustment across the industry that allows the supply chain to maintain its net margins but also drive its cost base down. This has to be done collaboratively and sustainably and not simply be a knee-jerk response to the “cut costs by 15-30%” rhetoric.
This time, the whole industry needs to take a good, long look at itself. Costs will fall as supply outstrips demand. But rather than letting the market and oil companies dictate our cost base, we have to get costs under control through creative and collaborative solutions that deliver efficiency and value, and then ensure they don’t start creeping up again as soon as the oil price picks up. In a wider context, technology developments that help improve productivity, reduce costs and enhance quality are today’s pressing issues.
With the exception of a brief period of uncertainty in the financial crisis of 2008, LR Senergy has only operated in a robust and stable oil price environment, which we have used to build a highly capable and respected business. We must now respond with equal dexterity to a reversal of the commodity cycle which may take some time to return to a price point where our customers are making good margins. Having a differentiated product built on a solid reputation for excellence, as we do, has never been more important.
Our first response to the drop in oil price was to introduce a business efficiency initiative last year. We looked at how to reduce our costs, increase our utilisation and win new business. Our board took pay cuts and the difficult decision to make a small number of redundancies. Having suffered the pain of redundancy myself, in 1986 after an oil-price crash, this is never an easy thing to do, but we have a responsibility to sustain the business for the long-term and protect the majority of our workforce. Companies in the supply chain, who don’t or can’t take prudent steps to protect themselves may well go to the wall. I have a feeling we will see some small independent operators go bust and a garage sale of some companies throughout the supply chain in the next few months.
Technology solutions and behaviours will help save the day. Entrepreneurialism will be effective. New technologies bring improvements, but many also bring new limitations, which require operators to revisit accepted risk-management techniques, develop their standards, procedures and methodologies, and apply their experience in new ways. Collectively, we all need to look harder at technology to help solve many of those issues.
In the current climate, great companies will survive and new ones will be built as those with fresh ideas come to the fore. Among the lemmings, who will simply go with the flow, there are always the 5% who go in a different direction, who lead and excel.
LR Senergy has always had a diversification agenda and this will be more vital than ever. Our internationalisation strategy has given us a truly global perspective.
It’s time for more positivity than negativity. I firmly believe that now is probably one of the most thrilling times to join our industry and be part of its reinvention.