CERAWeek 2015: Future of upstream costs

Pritesh Patel, Director, IHS Energy, chaired the Tuesday morning breakfast session titled "Future of Upstream Costs." The panel agreed that low oil prices will likely remain into the foreseeable future and will require companies to be strategic in managing their costs. Producers will need to be selective in their use of capital and look closely at their processes to improve efficiency. Standardization across the industry could help improve efficiency and reduce costs.

Nick Lowes, Vice President for Oil and Gas Consulting at IHS Energy, said that even before the current situation, oil prices were decoupling from the return on capital. IHS Energy noticed that when oil was still above $100/barrel (bbl), the return on capital had fallen by 10%. He said a variety of different standards are currently layered on top of each other, increasing the complexity of projects and driving up costs. More collaboration and standardization between producers would help bring these costs down.

Douglas Meikle, President, Valves and Measurements at Cameron, described the current industry situation as a "price reset" in which Cameron needs to prepare for $50-70/bbl crude oil prices for the next three to five years. As a manufacturer of both standardized and customized, single-customer-specific products, Cameron has clearly identified cost savings from standardization. For specialized manufacturing companies like Cameron, finding cost savings in the supply chain is difficult because the prices of materials have not fallen significantly. Instead, Cameron, has improved process efficiency.

Mario Azar, CEO, Oil & Gas and Marine at Siemens, highlighted the importance of protecting research and development (R&D) when cutting costs. He stated that cutting R&D sacrifices future growth to protect margins today. To reduce costs, Mr. Azar stated that the industry should look closely at overall oil field design and reduce redundancies. He also believes that the current market dynamic presents an opportunity for the industry to recalibrate and that this recalibration is needed across the entire value chain to improve efficiency and reduce waste.

Andrei Gaidamaka, Vice President at Lukoil, stressed the importance of currency fluctuations in cost management. Lukoil has had a 23% reduction in costs due to the decline of the ruble. This has provided the company with the opportunity to cut capital expenditures significantly without a subsequent change in activity levels. However, he said the substantial decline in crude prices will require some activity to be cut, and contractors will need to reduce their operating costs because it will be difficult for them to renegotiate contracts. He reiterated the need for more standardization across the industry and said Lukoil and similar companies will rely more on conventional oil and gas plays that are less expensive to develop and lower risk. He also expects local governments to be more flexible with oil and gas companies both on fiscal terms and availability of reserves.

Luis Travesedo Loring, Senior Vice President, E&P at CEPSA, said that while no one knows what future oil prices will be, companies need to prepare to be profitable at an oil price of $50-70/bbl in the future. He said the development of unconventionals in the United States serves as an example to other regions. Many of the US unconventional plays are economic at today's oil prices, and the improvements that US producers have made in efficiency and operations will be "the best practices of tomorrow" for the rest of the world. He also stressed the importance of focusing on talent management during difficult economic times. He said that the industry needs to work to develop good people who have new ideas to help the industry weather current conditions and ensure strong leadership in the future.

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By Keith McWhorter April 21, 2015

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.