|Date Published||March 30, 2017|
|Company||Calgary Women In Energy|
|Article Author||Colleen McDonell|
|Article Type||March 2017 Issue|
|Category||Articles, Oil & Gas|
|Tags||Cost-Cutting, E&P, Oil & Gas Future, Oil & Gas Recovery, Reduce Operating Costs, S&S, Suppliers|
Pricing in the oil and gas industry moves like a pendulum. Downturns move costs and prices away from where they were during the good times, and recoveries move said costs and prices back in the opposite direction. After this prolonged downturn, many are saying prices will never recover. Being an optimist, I believe we are on the road to recovery; although, it may take longer than it has in the past.
At the beginning of this downturn, service companies responded to the “Dear Valued Vendor” letters with rate decreases believing in the customer-supplier relationship. But after two and a half years of constantly renegotiating previously agreed-to rates and signed contracts, it now feels like duress. Producers, admittedly struggling themselves, continue to have the upper hand in these discussions. If a supplier does not “come to the table”, they will simply be taken off the approved vendor list. In some cases, service companies have been asked to present their costs and margins all in the name of transparency and cooperation. In other instances, producers have unilaterally
made decisions on what they will or will not pay. The openness and partnerships touted by the producers are not being reciprocated. While some believe the grinding down of prices was a much-needed market correction and they will be maintained at this current level, I personally believe service companies will not forget how they were treated during this time, and we will see prices creeping up.
Considering the factors above,
I think it’s safe to say we are
on the upswing.
There’s another component to two years of cost cutting: prices and margins have been trimmed to a point where service companies have had no extra cash to invest in new assets or inventory. As a result, producers are having to make do with older equipment and/or adjust their programs to use what inventory is available. In some areas, there simply is no inventory. Further, the tens of thousands of people who were laid off may not be keen on coming back to the industry. Even if they wanted to come back, the service companies are not able to guarantee how long they could remain employed. I heard of this scenario happening at several job fairs this year. So, this winter we saw service crews stretched to the limit, and producers ended up waiting on services or not able to complete all the work they planned on doing. The demand for products and people is increasing, but the supply is not there. Microeconomics 101 tells us this situation will also lead to an increase in prices.
The third element that may lead to an increase in pricing is HSE. Instilling and maintaining a corporate culture of safety is not inexpensive, but the ROI on safety spending has been proven time and time again. Positive returns aside, companies are running out of costs to cut, which forces some to trim their HSE budgets. While price is the main driver for procuring services today, increased costs due to increased incidents due to decreased attention to safety will soon mean producers will have no choice but to use safer service providers, who will not necessarily be the cheapest.
It’s difficult to say how long it will take for prices to recover. But, considering the factors above, I think it’s safe to say we are on the upswing