Over a barrel
The price of a barrel of crude oil has dropped steeply since June 2014 due to slowing demand and a global glut. That's good news for consumers—but big trouble for the organizations that bring oil to market. The price nosedive has pushed many planned oil exploration and drilling projects below the breakeven point, forcing organizations to review their project portfolios—and bring out the butcher knife.
"The margins are thin, but demand is still there. They just need to figure out whether they can do things more cost-effectively."
–Carl Larry, Frost & Sullivan, Houston, Texas, USA
This review process will cause many companies to abandon once-profitable project plans because they no longer deliver a viable return on investment, according to Amin Nasser, senior vice president for upstream operations, Saudi Aramco, Dhahran, Saudi Arabia. US$1 trillion of planned projects “will be dropped or deferred over the next couple of years because of what's happening,” he said at a conference in March, according to Reuters. Saudi Aramco has put its own deep-water oil and gas exploration and drilling projects in the Red Sea on hold.
Mr. Nasser's organization is hardly alone. Many oil companies are shutting down major projects and tightening budgets and scopes on those that remain active, says Carl Larry, director of business development, oil and gas, Frost & Sullivan, Houston, Texas, USA. “The margins are thin, but demand is still there,” he says. “They just need to figure out whether they can do things more cost-effectively.”
Achieving a new balance between profitability and cost is the key to determining which projects will continue, says Patrick Allman-Ward, PhD, CEO, Dana Gas, Sharjah, United Arab Emirates. “We are seeing a lot of projects in the region being rephased and rescoped with new cost reductions,” he says. “Project managers are under a lot of pressure to go back to the drawing board to figure out how much cost they can take out of the project plan.” That often includes renegotiating contracts with suppliers, trimming staff or even extending a project schedule in order to wait out the market until prices recover.
The fall in oil prices has made many projects in the North Sea unprofitable.
But sometimes streamlining costs isn't enough to save a project. BP CEO Bob Dudley said in February that the fall in oil prices made many projects in the North Sea unprofitable. BP plans to shrink its global portfolio of capital projects by US$4 billion this year. In the same vein, Royal Dutch Shell has pulled the plug on a longdelayed oil sands mine in Alberta, Canada that was expected to produce 200,000 barrels per day.
Yet other projects still offer enough payoff to portfolio managers to keep them alive. BHP Billiton, for example, is going to cut back shale drilling on several of its projects in the western part of Texas, USA, but will continue drilling projects on the lucrative Black Hawk shale field in the state's southern region.
In the Gulf of Mexico to the south, the U.S. government expects oil production to keep rising through 2016 due to both new offshore projects and the redevelopment of older oil fields. “Because of the long timelines associated with Gulf of Mexico projects, the recent downturn in oil prices is expected to have minimal direct impact,” the U.S. Energy Information Administration (EIA) reported in a March press release.
To further bolster the profitability of these ongoing projects, many sponsors are rolling out innovative new technologies to drive greater efficiencies. For example, BHP Billiton last year implemented restricted-flow drilling technologies at the Black Hawk field project site, which led to a 21 percent improvement in drilling times.
Some industry experts expect the price of oil to bounce back to US$100 per barrel within five years.
To mitigate the high cost of deep-water drilling infrastructure in the Gulf of Mexico, more than half of the projects starting there in 2015 and 2016 will use “subsea tiebacks” to connect to existing production platforms, according to the EIA. That will reduce costs and startup times.
The Talent Impact
Some industry experts, including Mr. Larry, expect the price of oil to bounce back to US$100 per barrel within five years. (Crude oil prices were above US$100 in June 2014.) But that's cold comfort to the 31,000 people laid off across the industry as of January due to the recent downturn in project prospects. That number is expected to rise sharply throughout 2015—and it includes project managers, says Dr. Allman-Ward. Although they'll need the talent again when oil prices get closer to US$100, short-sighted companies looking to cut costs will likely eliminate project managers, he says.
But not all organizations are making the same mistakes they made in the 1980s, when the industry experienced a similar contraction and had to deal with a deficit of experienced mid-level project and program managers years later, says Matthew Stevenson, partner, workforce analytics and planning leader for global consultancy Mercer in Washington, D.C., USA. “Some organizations are thinking about where they want to be in 20 years and who they need to grow internally to get there,” he says. “They want to avoid what happened in the ‘80s.” —Sarah Fister Gale
JUNE 2015 PM NETWORK