CERAWeek: Standardization is key

Global oil prices are bound to turn around to play its part of the oil and gas industry’s cyclical series that has been in place for decades, with standardization playing a key role, industry experts said at IHS CERAWeek in Houston on Tuesday.

Image from OE staff.

Adam Sieminski, US Energy Information Administration administrator says the cycle depends on your age and how long you’ve been in the markets.

“I was with Mr. Al-Naimi about a year ago and we were outlining the numbers of ups and downs that we’ve been through and we had seven major price decreases and six major price increases, not the three or four other people have talked about,” Sieminski said. “The point is that the comments that you’re hearing are correct: this is a cyclical industry. It tends to self-correct. What no one has figured out is how to reduce the volatility.”

“The market itself is telling you that the price is highly uncertain and everyone should have a plan B,” Sieminksi said.

Cost reduction in today’s higher cost production trance is one piece of the puzzle that oil and gas companies are looking at and are feeling pressure, and Dave Pursell, managing director and head of macro research at Tudor Pickering, Holt & Co., said that standardization will be a key asset.

In the deepwater sector, Pursell said that for a 30% cost reduction, there are three factors where costs can be reduced: wells, facility, and compressing cycle time.

Well costs are easiest to cut due to the fact that there are too many rigs in deepwater, and that contracts can be cut, however, it’s more difficult when it comes to facilities and compressing cycle time, Pursell said.

“Reducing facility costs and reducing the cycle time, drive towards standardization, whether it’s industry standardization or company standardization,” Pursell said.

In the US, Pursell said that well costs are down 30-40% from 18 months ago, leaving a lot of idle equipment, with no one to crew the equipment. There will be a significant amount of wage inflation on that first round of activity rise. Oil and gas companies will need to pay their employees more to encourage people to come back to the business, and put some maintenance capital back into the pricing system.

“We think the first couple of hundred of rigs that go up, will have a meaningful increase in cost that will surprise people,” Pursell said. “We think that cost savings in deepwater will rely heavily on standardization.”