Oil Majors Seek to Claw Back Costs from Service Firms

Posted by Michelle Howard January 22, 2015

Global oil majors say they are demanding cheaper but better services from engineering and service companies, or simply taking work back in-house, after losing hundreds of billions on cost overruns in the last five years.

Cost overruns and delays were the main reason why oil majors generated less cash than shareholders expected when oil was over $100 per barrel.

With oil now half that price, the urgency of addressing costs and delays rises by the day for the producers.

While keen to avoid accusations of ganging up to force terms on suppliers, they are exploring measures that are likely to put further pressure on services companies such as Schlumberger and Halliburton, which have already cut thousands of jobs as business shrinks.

"In the 80s and 90s, we were very close to the projects and controlled costs and execution. In 2000s, when we became rich, we became less cost-efficient," said Claudio Descalzi, chief executive of Italy's ENI, one of the oil majors that meet in Switzerland every year on the sidelines of the World Economic Forum in Davos.

The group includes the listed BP, Royal Dutch Shell , Total, Chevron and Statoil and state giants Sinopec from China, Pemex from Mexico and Aramco from Saudi Arabia, making it the world's most powerful gathering of oil companies.

The boss of Aramco, Khalid Falih, said the group had held a closed-door meeting to discuss how to change the nature of relationships with oilfield services and engineering firms to deliver projects on time and on budget.

Industry research shows that over 100 large projects exceeded initial costs by a cumulative $400 billion in the past five years, according to participants.

"Last year, when oil was at $100-110 per barrel, many colleagues already spoke about cancelling projects as they were not able to justify them, even at that price," Falih said.

Emilio Lozoya, head of the Mexican oil giant Pemex, said: "We simply need to bring costs down in line with the current lower oil prices."

Participants in the meetings said a range of ways to collaborate had been suggested, including having a shared database that would list the best and worst service companies by region, and a 'rule book' for systems and components.

Falih said the industry could push for common standards for equipment such as pipes or valves.

Descalzi said the industry as a whole was actively moving to contracts where payments are based on timely execution.

He said lower oil prices offered a good opportunity for the industry to renegotiate some existing contracts or move work in-house:

"In the 1980s, we didn't use EPC (Engineering-Procurement-Construction) contracts. We did a lot of things in-house. In the 2000s, we outsourced a lot of things and became weaker in engineering."

ENI recently hired 2,000 people to bring work in-house, Descalzi said. "Ultimately, you save billions of dollars if the project is delivered on time and without cost overruns."