What gets measured gets managed…

Chevron and BP released data this week highlighting their continuing focus on reducing production costs and productivity improvements. To set the tone in their Annual Report for 2017 for BP made this comment to the above graph:

Dated Brent crude oil prices averaged $54.19 per barrel in 2017 – the first annual increase since 2012 but roughly half the average of over $110 seen in 2011-13.

Which just goes to show that while the offshore industry is using an oil price USD 60-70 to show increasing confidence it may not feel like that to an E&P company who spent billions on projects with significantly higher price assumptions a few years ago:

BP Upstream 2017.png

 

This Chevron slide highlights why the Demand Fairy hasn’t appeared in  offshore despite a rise in prices:

Chevron category cost reductions.png

Spending on Subsea at Cheron is down nearly 70% since 2014! This is an absolute number so the fact that Chevron have completed some major projects influences this, but it also doesn’t change the fact of the scale downwards in subsea spending that a ‘Super Major’ has managed to make in a very short space of time. That drop in production costs comes solely from doing stuff internally cheaper but in reality by procuring from the supply chain at ever cheaper rates.

BP has also dropped its production costs significantly:

BP Unit production costs 2017.png

The blue “REM” by the way means the remuneration committee looks at this before allocating senior manager pay. In other words senior managers have a great deal of economic interest in ensuring this gets lowered constantly, as the dictum goes “what gets measured gets managed”. Interestingly in 2013 this wasn’t a metric, then it was all about operating cash flow and delivering production targets and projects. Now saving a few thousand a day on a rig or vessel, going offshore for less days, doing more work onshore if possible, all these will be looked at with a degree of rigour unknown in past times. This is a new and constant trend in the offshore industry and I doubt it will ever go away now.

The continuing impact of this for those involved in offshore is clear: there will be a relentless focus, despite an easing of spend for offshore, on driving costs down. These targets will be filtered down the organisation through objectives and goals to other managers who will be bonused against cost reductions. Pushing the supply chain to lower costs will be measured and therefore managed: the clear implication in a period of oversupply is continuing margin pressure.

The argument that offshore spending will have to increase as the Reserve Replacement Ratio is dropping is starting to look tenditious as well:

Chevron resources.png

Clearly it’s all about the shale at Chevron, but BP was fine as well:

BP RRR 2017

Chevron is making clear where future investment will go:

  1. Deepwater US

Deepwater US.png

2) Shale in the Permian (note the comments re: “factory” something I have discussed here before)

Permian.png

While BP is also making clear that offshore is important but will only be part of its investment in projects:

BP project mix 2021

Two companies doesn’t make an industry, but these were, and remain, significant investors in the offshore space. But it is clear they have changed in a structural way how much they will invest in offshore, and how the invest in offshore, and the amounts are significant to the offshore industry supply chain as a whole (especially as they don’t seem to be anomolies).

When I look at data like this,l and see business plans that rely solely on an “inflection point” in demand, or waiting it out for “the recovery”, I don’t think they are reflecting likely scenarios now. A base case for offshore is surely one without a dramatic change in demand conditions? The implications for many business models in the offshore space from that are profound nearly four years after the price decline began.

 

 

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