‘Oil firms need to cut duplication if serious on costs’

Reuters/London

Energy firms need to start delegating properly to the companies they employ as contractors and have confidence in them if they are serious about their cost-cutting mantra, Kristian Siem, chairman offshore oil services firm Subsea 7 said.

Big oil companies, such as Shell and BP, are cutting spending this year to save cash for dividends, in response to shareholder demands for bigger returns after years of rapid spending growth and cost inflation.

Investment bank Barclays estimates that spending by major oil groups will fall 0.4% globally this year, ending three years of growth, with the North Sea suffering the most.

Despite the emphasis on costs, Siem says there is a lot of duplication in the engineering sphere partly because of increased regulation in the wake of BP’s Gulf of Mexico oil spill. Oil firms employ contractors but many also put their own people on the same job, continually double-checking the work.

“We have seen a trend in the last few years, partly influenced by (BP’s) Macondo (accident), of more regulations, more requirements from authorities to make checks and duplicate efforts,” Siem, also the Chairman of Siem Industries, which owns a fifth of Subsea 7, said.

“Our organisation is working flat out communicating its work to the client rather than getting on with the work. It takes two engineers to do one job because one is sitting on the back of other,” said Siem, 64, who has spent more than 40 years working in the oil and gas sector, including more than a decade on the board of drilling firm Transocean until 2008.

“We once had a UK client – Venture Production - that used Subsea 7 as their engineering department,” said Siem, sitting in his low-key London office, decorated with pictures of ships, including subsea construction vessels and old cruise ships he used to own.

“When we eliminated the duplication and interference, the operator had lower costs and we had a higher margin.” Subsea 7, which focuses on deepwater engineering and construction, is one of the industry’s biggest firms in the sector with activities focused around Brazil, the North Sea, the Gulf of Mexico and southeast Asia.

Siem said he was not overly concerned about the budget cuts by energy firms because spending was still high.

“It’s a reduction from a very high level and the reduction is typically less than 10% and in most cases less than 5%. It’s not major,” said Siem, whose previous jobs also included running oil services firm Kvaerner, which specialises in building heavy equity equipment for the sector. He predicted continued high activity for the oilfield services business, particularly in the deepwater market, as new plays open up around the African coast in places like Ghana and Mozambique.

He said the drop in oil company spending on offshore oil and gas might even be healthy for some markets such as the North Sea, where the slowdown has already eased pressure on runaway costs for everything from people to equipment.

Costs have risen sharply across the sector, partly due to a shortage of engineering capacity, and North Sea operators have suffered the most as their already high costs have increased faster than average.

The drilling rig market, which Subsea 7 is not involved in, is more likely to feel pain from oil company cuts. It is facing big drop in contract rates because of lower-than-expected activity and an oversupply of vessels.

“I don’t think the demand will increase sufficiently to take the increase in the supply and if I’m right, you’ll have more supply than demand and then rig rates will collapse,” Siem said.

Although utilisation in the market is around 97%, more than a dozen rigs come off contract or enter the market without contracts in the next quarter, leaving the market greatly oversupplied. Another several dozen brand new rigs, ordered during the period of record earnings, are set to come on to the market in the next three years and many have no contracts.

Ultradeep-water rig rates have fallen from a peak of around $625,000 a day to the $525,000-$550,000 range now and analysts see them dropping further with estimates ranging from $400,000 to $475,000.