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Exactly one year ago, I reported on a blooming international oil and gas industry, at an all-time-high investment and activity level. At the same time, I warned against over-heated markets and some dark clouds on the horizon. Now, one year later, the clouds are here!
No doubt, the high investment and activity levels have created an added demand for technical services and deliveries, way above current capacity, thus driving costs to sky-high limits, in a fierce, spiraling price escalation, seemingly out of control. And the combination of increased costs, complexity and risks adds a burden to our shoulders, which becomes increasingly harder to bear. Add a significant corresponding drop in profit margins, and then the consequence is inevitable.
The sky is never the limit, and a correction needed to come at some point. And it surely did—it’s already here, and it probably arrived sooner that most of us anticipated. This time, it’s not even driven by the financial markets; we simply did this to ourselves. The hard facts are tough to swallow: In a situation with already unhealthy cost levels and low margins, perhaps as much as three-quarters of the world’s largest field development projects in the oil and gas industry, as of today, end up costing more than originally planned, and more than half of them are delayed. This is not a good place to be, for practicing good business. The previous, solid trademark concepts of company robustness and long-term cash flow security keep fading, and we need to respond.
It’s strange, how quickly the tide turns. The industry always has, and probably always will, operate in cycles. Highs and lows appear in more-or-less consistent patterns, as they are impacted by an endless row of parameters and events, ranging from weather conditions to international politics. In a self-amplifying rat-race, we act as a crowd, dragging each other along, whether we want to or not. Ultimately we become a more turbulent industry that struggles to attract long-term investors. This, in turn, adds further financial burdens and challenges to our shoulders, and we get stuck in a vicious cycle of cost explosions and diminishing returns on capital spent.
To counteract this trend, and to strengthen their future positions and secure long-term profitability, many major operators now introduce their internal cost-cutting and efficiency programs, with a clear aim to achieve more for less. Reduced bureaucracy; simpler and more standardized technical solutions; better risk management; more focus on company core areas; postponing less profitable or higher risk projects; and staff reduction and possibilities for outsourcing none-core activities, are all elements that are being turned upside down in the search for improved efficiency and a robust, sustainable future. There is a broad industry alignment on the need to do this, and a consensus that perhaps, for a change, we have been pro-active and started preparations well ahead of the explosion that we were inevitably heading toward. Yet, many analysts state that this should have started even earlier still, and that we may not yet be as pro-active as we would like to think we are.
Statoil ASA introduced its internal technical efficiency program to the capital markets, back in February. The conveyed message was that the company would deliver on set efficiency improvement targets, while simultaneously continuing to increase investments, albeit just a little less than previously planned. Targets are improved drilling efficiency offshore and onshore; leaner facility and modification projects; reduced installation and plant operational costs; as well as increased production efficiency, aimed at unlocking more than $1 billion of permanent cost-savings. More importantly, this shapes the company as an even more efficient player, set up to meet and deliver within the tougher conditions of tomorrow. Additionally, the company continues to regroup and optimize its asset portfolio, and will likely also postpone some of the higher-risk, less-profitable or capital-intensive development projects.
This was received well by the investors, but not necessarily so by the local service industry. It is interesting to observe the psychology of such processes, as this message gradually, and with increasing intensity, translates into crisis-like conditions in the Norwegian industry. With a self-amplifying, accelerating momentum, this now happens over a short period of time. What was a blooming industry, just one year ago, has now suddenly turned into a growing crisis. Already, thousands of jobs have vanished, and headlines describing new mass lay-offs appear almost daily in the local newspapers. And the recent dip in oil price doesn’t provide any comfort or hopes for an immediate, quick fix to the problem.
Still, consolidating and strengthening the position, in a time when we can actually do something constructively about it, is the right thing to do. Statoil has chosen to lead the way on the NCS. We do this to build a stronger and sustainable future for the Norwegian industry. So, never mind the pain right now; this is what it takes. And at some point in time, vaguely into the future, we will look back on this and think, “Thank God we did it!”
After all, the future is still bright! 
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