Big Oil is No Longer Fat and Happy

Feb. 29, 2016
The oil industry has a new watchword in a period of $30 oil – efficiency.

Remember when a barrel of oil sold for $100? If you attended the recent IHS CERAWeek energy conference in Houston, that figure was mentioned frequently with wistful nostalgia. While industry veterans cite the cyclical nature of the business and live by the motto “Never say never,” it’s a pretty safe bet that oil (selling for about $33 at this writing) won’t be seeing that exalted level for quite some time.

Cheap oil has led to a wave of red ink, layoffs, dividend cuts and reductions in capital spending. In 2014, investment by the oil and gas industry was $700 billion, noted John Hess, CEO of Hess Corp (IW 1000/389). This year, it is expected to be $400 billion. In the United States, the number of active oil and gas rigs has plummeted from 1,900 in 2014 to about 500 today.

“Very few things make sense at $30,” said Hess. “They barely make sense at $50. It’s better to leave the oil in the ground and run your company for value as opposed to volume.”

Lamar McKay, the deputy group chief executive at BP (IW 1000/5), said the oil industry was experiencing one of the "most difficult" downturns in recent history. BP cut its CapEx budget by $4 billion and its operating expenses by $3.5 billion in 2015. The company lost $6.48 billion last year and has plans to cut 11,000 employees.

ConocoPhillips (IW 1000/74) is feeling the heat as well. CEO Ryan Lance told IHS CERAWeek attendees that forecasts call for a recovery beginning by the end of 2016, but he said it was important to plan for the worst. “You can’t count on the [Saudi production] freeze working or a soft landing in China,” he told the oil industry meeting.

Financial triage at ConocoPhillips involves maintaining existing oil production but deferring projects in early engineering phases and cutting back developmental drilling programs. In the future, said Lance, it will be essential to watch costs.

“We don’t want to lose the margin focus going forward,” he said, adding, “Margin is going to be king.”

The shale revolution that made the United States a leading energy producer has stalled on cheap oil and an enormous global oil surplus. Hess, for example, said it had 17 rigs operating in the Bakken oil field two years ago. Today, it has two rigs and that is only to preserve its long-term operational capabilities.

American oil companies got little sympathy from Ali Al-Naimi, Saudi Arabia’s oil minister. He said rather than cut production, the kingdom built on oil will let the market take its course.

“Producers must find a way to lower costs, borrow cash or liquidate,” Al-Naimi said. “It sounds harsh and unfortunately it is but it is a more efficient way to rebalance markets. Cutting low cost production to subsidize higher cost supplies only delays an inevitable reckoning.”

Oil companies wanting to avoid such a reckoning have a new watchword – efficiency. BP’s McKay said it was tackling project costs through a variety of avenues, including reductions in duplication and complexity, and more standardization. McKay said such efforts were paying off at its Mad Dog drilling project about 190 miles south of New Orleans in the Gulf of Mexico. McKay said he expected the project to be 50% less costly than originally estimated three years ago and have better returns at a $60 oil price than first estimated when a barrel of oil was $100.

GE (IW 1000/18) CEO Jeff Immelt was just one of the manufacturing leaders at IHS CERAWeek preaching how new technology could help oil companies become more efficient. He said submersible pumps in a shale gas field are equipped with a dozen sensors measuring in real time factors such as temperature and composition of the fluids. Data analytics could provide a 5% improvement in recovery from that field, he said, that “monetizes itself right away.”

Automation leader Emerson (IW 1000/170) cited various studies concluding that the energy industry could use best practices and new technologies to save more than $50 billion in maintenance costs and $10 billion in energy costs. Emerson launched a program designed to help energy companies perform in the top 25% of their peers. What does that mean? A $1 billion project would cost a fourth quartile company $1.6 billion. For a top 25% performer, the cost would be $750 million, a savings of 53% to the least efficient companies. Even in the oil industry, that’s real money.

About the Author

Steve Minter | Steve Minter, Executive Editor

Focus: Leadership, Global Economy, Energy

Call: 216-931-9281

Follow on Twitter: @SgMinterIW

An award-winning editor, Executive Editor Steve Minter covers leadership, global economic and trade issues and energy, tackling subject matter ranging from CEO profiles and leadership theories to economic trends and energy policy. As well, he supervises content development for editorial products including the magazine,, research and information products, and conferences.

Before joining the IW staff, Steve was publisher and editorial director of Penton Media’s EHS Today, where he was instrumental in the development of the Champions of Safety and America’s Safest Companies recognition programs.

Steve received his B.A. in English from Oberlin College. He is married and has two adult children.

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