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Technip CEO Thierry Pilenko. |
“We are in an environment where something was broken.” It’s a harsh summary but one few would dispute.
Nor would many now dispute Technip CEO Thierry Pilenko’s view that the oil and gas industry is in a “harsh prolonged downturn,” with some 250,000 jobs lost in the industry.
Clients will continue their opex and capex discipline and we shouldn’t expect to see much strategic thinking, he says. “It’s about short-term cash. As a result, expect to see continued pressure on supply chain.”
Of course, Pilenko, speaking at a press briefing in London Tuesday morning, was looking to set out how Technip stands out from the rest and is best suited to helping its clients reduce costs and improve efficiencies.
But, his comments offer an insight into how at least one Tier 1 firm views the market – both in terms of how it got in this mess and how companies, both his and others, are looking to get out of it.
It’s a mixed picture, overlain with a lack of trust, with some seeing opportunities, others fighting for their lives, and some significant differences to previous downturns, namely, a trend towards alliances, to broaden corporate offerings, rather than the pure play consolidation seen in past cycles.
“[It’s] A harsh and prolonged downturn,” Pilenko declares, repeating Technip’s official summary of the market. “We started to use this term quite some time ago. We [Technip] started to see signs of something changing in Q2 2014. We started to see a change in the way our clients were reacting to the market, at US$100-110/bbl. In July 2014, in spite of having a pretty robust set of results, we started talking about these changes. Then we started to see a slow erosion of the price of oil down to $85.” After that, OPEC decided not to decrease production to counter the falling prices, and the downturn deepened and has become longer than anyone anticipated, Pilenko says.
He points out that little is going to change any time soon. “We are not in an environment where production is going to be dramatically removed from the market,” he says. “A lot of projects from last 4-5 years are coming to the end and are going to start producing.” Even if there is an increase in prices, “it will be marginal compared to what is needed in terms of cost reduction in this environment,” he says.
Back at $100/bbl, there were already a number of projects that didn’t make sense because they were just too expensive. It was already unsustainable at $100/bbl, he says. “We are in an environment where something was broken. We were surfing an inflation curve that was just not sustainable.” The depth of the issue wasn’t just about cost inflation either. Pilenko highlights projects which have run massively over budget and schedule, such as Kashagan and Gorgon.
Different companies, contractors and operators, have reacted differently, he says, with some saying this is an opportunity, and others that it’s a challenge. For the North Sea industry, the situation is particularly difficult, Technip UK managing director Bill Morrice told the briefing, driven by a higher cost base and falling production levels, which have combined to increase unit lifting costs. There are also deeper issues here; inefficiency unnecessarily high specifications and standards, limited company contracting and a lack of trust from the top to the bottom of the supply chain, Morrice says.
“There will be no quick recovery in the UK,” he warns. “The UK badly needs transformational change, cost reduction on its own is a short-term approach.” A tripartite approach, between government, treasury and industry is working to make the changes recommended by Sir Ian Wood in his Maximising Recovery report from 2014, including an efficiency task force, led by Oil & Gas UK, with a Technip representative leading the subsea technology element under a heading of standardization.
The harsh reality, however, is that there is less work to go around. But still, companies view this situation differently. Pilenko highlights this by quoting the different messages coming out of the industry, from doomsday messages to positively about opportunities for collaboration.
For Transocean, at the front end of the drilling segment, where some 100 of 480 rigs globally are without a contract and another 120 are being built and due to enter the market in the next 4-5 years, it’s tough going, he says, quoting a Transocean statement: “We're in an unbelievably challenging environment. And so, we're really focused on those things that we can control.”
Others are putting a more positive spin on the situation, such as Schlumberger - “We are working closely with our customers to help reduce cost per barrel through better operational efficiency and reliability.”
Pilenko also cites a comment from Cameron - “Collaboration with suppliers has a potential to unlock new and creative approaches.”
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The Deep Blue pipelay and construction vessel. Photo from Technip |
So what has Technip done? Technip started to take measures in July 2014, despite the year being a record in terms of new orders, with a restructuring, reducing its head count by some 6000 and reducing its vessel fleet. Pilenko says the firm has made $711 million (€650 million) in savings off its entire cost structure. It has targeted $908 million (€830 million) total savings by 2017, with $700 million of that to be delivered in 2016. And Pilenko proudly displays a backlog which spans into 2017.
But, there will still be a huge pressure on cost and a need to find different ways of working, which will mean accelerated standardization and simplification in the industry, he says, and, if companies adapt and find solutions, it “will translate into cultural changes in the industry and the way we work and the way we work with our clients.”
“This means going beyond just reducing cost,” Pilenko adds. “The industry is already working at this. Some are reorganizing, some are centralizing, some are divesting non-core business, some are collaborating with other firms, others are integrating and broadening their portfolio through acquisition or alliances.”
In this respect, the reaction to the down turn is different from in the past. “The industry is looking at businesses that are complimentary so we can combine them to find solutions,” he says. “In previous cycles it has been much more about consolation, more of the same, drillers buying drillers, pressure pumping buying pressure pumping.” This time you have the likes of Fluor, a diversified engineering company, for the first time investing in fixed assets – a yard in China with COOEC – to find maybe new ways of delivering large modules.
“The best example is Schlumberger moving into subsea with the acquisition of Cameron,” says Pilenko, highlighting those who are broadening their portfolio. Whether all the alliances formed will work has yet to be seen, he suggested, pointing to alliances made before companies were then acquired by other businesses.
This all leads to what Technip has to offer, of course. Traditionally a conservative company in terms of how much it talks about itself, outside its stock market statements, the firm is showing signs of bringing out its big guns, both in terms of its new joint venture with FMC Technologies – Forsys Subsea – as well as its engineering consultancy business Genesis, which, although very much involved in the industry, keeps a low profile.
Pilenko also says Technip is less the EPC company or EPCI subsea company it has traditionally been seen as. Over the years, the firm’s other activities have grown, including manufacturing, life of field services, vessel services, conceptual and FEED, technology, project management consultancy, engineering procurement and construction management, and these will continue to grow, he says.
More directly relevant to the current market, Forsys will provide a “step change in project economics,” Pilenko says. For Rasmus Sunde, Forsys’ CEO, “it’s all about costs. Costs for subsea hardware has basically tripled and the delivery time has doubled. This was an issue at $100. It’s clear this isn’t sustainable.” Some of it is due to more complex reservoirs, higher temperature and pressure fields, deeper waters. But, lack of standardization and inefficient execution are also factors. Forsys offers potential to realize “significant potential” by looking at the interfaces between umbilical and subsea production systems (SPS), simplifying packages and installation. Contractually, it also makes sense, he says.
“We are taking on a lot of interface risk between SURF and SPS that is traditionally held by the client,” Sunde says. “On many projects this has been one of the biggest challenges clients have faced. The contracts for SPS and SURF were built up in such a way that naturally each party set up to optimize their own scope at expense of optimizing the whole project.” But the firm will also focus on life of field and new technologies.
Indeed, Forsys, formed on 1 June, recently revealed its first two, unnamed, contracts, one as a conceptual greenfield study for an independent operator and the second a front end study for a brownfield development. The firm is targeting an EPCI award in 2016.
At Genesis, adding new expertise is also the flavor of the day in order to better integrate projects and, crucially, ensure the right projects are chosen. Specifically, Genesis has been working with an unnamed subsurface company to help integrate surface and subsurface when it comes to project concepts, an area which traditionally been in silos, resulting in lack of alignment.
“We believe this is how we continue to build this portfolio,” Pilenko says, “creating new solutions. The future is in reducing cost and finding solutions. The answers are early engagement with clients, standardization, integration, and technology – technology not just for the sake of technology but to enable the development of fields and reduce cost.”
Sunde is positive there is appetite for change. “The best things this industry has done is when the price is low. That’s when the mindset is open to test new things,” he says.
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