Have you ever heard the old adage, “Beware the cost of the lowest price”? It rings true now more than ever in the oil and gas industry. People often use cost and price interchangeably, but they are two distinctly different things. Simply put:
– The purchase price of the products and services you are buying.
– The cost your business has to incur to adopt the products or services you are buying.
The lowest priced vendor for a particular product or service doesn’t necessarily mean your business will always save money and be cost effective in the long run. Without
proper due diligence, often this ‘beat up the vendor on price’ strategy, eventually bites you in the ass! You end up spending more time and money due to unforeseen issues like poor quality, loss of time, and efficiency because of a subpar product or lack of vendor performance. Ouch! So much for the cost savings you thought would be realized during the vendor vetting and bidding processes.
Who can blame a producer for demanding the best possible price, but if there are no Energy Services Companies left in line to accept and do the work what difference does it make? There are a lot of angry individuals in the industry these days, many of which feel they have been dealt, not just a lousy hand, but that the cards are stacked unfairly against them. They have experienced a myriad of personal feelings and business setbacks during these troubling times. They have witnessed the utter destruction of many long standing and successful companies, both beloved industry buyers and crucial sellers of much needed and competitively priced services, supplies and rentals. It’s been eerily similar to losing several close relatives and/or friends due to an untimely and unforeseen death or tragic accident. The industry has gone through its own form of grieving which is resetting and bringing a new meaning to the Price vs. Cost debate!
After riding so high in the saddle, and even for many who had experienced one or more downturns before, the industry by and large still couldn’t believe oil prices would drop as drastically and so quickly. A small percentage of companies had the foresight to embrace a credit risk management program to stave off their bankers and investment groups, while others were still clinging to notions of short term price decreases in the hope of longer term and continued price escalations. The strong and credit wise survived for the most part, and the weak suffered alone or disappeared in their denial.
While declining and lower prices were the enemy, along came a change of government and a massive move to the left by the NDP in Alberta. Anger was rampant in the industry over higher corporate taxes, the prolonged royalty review, climate leadership plan, stalled federal pipeline approvals, lackluster provincial pipeline support, and the investment-killing carbon tax. Other jurisdictions around the world were coping with the price issue, sometimes life and timing sucks, but the uncertainty created as a result of these ideological positions quickly transformed the enemy and anger from low prices toward the NDP government. The cost of doing business increased while the prospect of attracting new investment all but dried up. More companies fell by the wayside!
The normal reaction to feelings of helplessness and vulnerability is often a need to regain control. If only we had sold, if only we had hedged, if only we had negotiated a better price, and if only we had a lower cost structure. In order to survive, or postpone the inevitable, many companies were forced to cut staff, reduce salaries, abandon contractors and renegotiate service agreements. The burden was being shared by all, but depending on your perspective, no one could really agree on who was taking the greatest hit! Forced lower prices ensued, at the cost of more fallen companies.
When are prices going to turn around? When will the governments come to their senses? Depression set in with all of the displaced workers and previous owners of now defunct companies. Plenty of sadness and even more regret. Those who are left attempting to still make a go of it in the new world of $50 oil are fortunate, but by no means clamoring for joy. They are expected to do way more, with way less. In order to do so, the industry has to reinvent itself from the top down, not only to just survive, but instead to thrive in this price environment. The cost of failure is all too close for comfort.
Here’s where the oil and gas is sitting today. Resigned that government policies are not going to change, at least for a few more years. Prices are likely to stay at or near current levels. Lower priced services, supplies and rentals are the new reality but likely can’t go any lower. Companies are now willing to find better ways of doing business. They are seeking out productivity improvements in all aspects of their business processes and procedures. Cost efficiencies result and profitability will be restored. The new business norm for the foreseeable future in the oil and gas industry.
We have all paid the price, but at what cost? The oil and gas industry is not a race to the bottom. It’s a race to uncover even more ingenuity and determination to rise above this adversity and uncertainty. It fuels our companies, feeds our families and powers the Canadian economy!