Oil Companies at Last See Path to Profits After Painful Spell
This port city built of granite on the North Sea has taken a battering in recent years. Plunging oil prices hit the petroleum industry, which dominates the economy. Tens of thousands of jobs were slashed. Projects worth billions of dollars were sent back to the drawing board.
Oil executives here now speak with a relief similar to survivors of a fierce storm.
“I feel good about the North Sea, to tell you the truth,” Mark J. Thomas, North Sea regional president for the oil giant BP, said in an interview at the company’s offices near Aberdeen’s airport. “It is remarkably different than where we were even just a few years ago.”
The brighter mood masks what had been a difficult path for the energy sector around the world.
When oil prices fell, the industry scrambled to adjust. It initially relied on tried-and-true tactics: cutting jobs and investment. But then companies realized they had to go further, starting a far-reaching reworking of their businesses to embrace new technologies and construction methods to stretch each dollar just a little more.
The result has been drastically lower operating costs and higher cash flows. Learning to live in a weaker oil price environment gives them upside if prices firm up. This shift was borne out in recent days as major oil companies, including Chevron, Exxon Mobil, Royal Dutch Shell and Total, reported much healthier results.
On Tuesday, BP was the latest to publish its earnings, reporting a $144 million profit for the 2nd quarter compared with a $1.4 billion loss in the period a year earlier.
Companies now reckon that current price levels will most likely persist, and that the $100 oil of a few years ago was “a great aberration,” Daniel Yergin, the oil historian, said in an interview. Indeed, BP’s chief executive, Robert Dudley, said on Tuesday he was planning on the basis that oil prices would remain around their current levels for the next five years.
“Nobody is standing around, waiting for prices to go up substantially,” said Mr. Yergin, vice chairman of the research firm IHS Markit. “The industry is in the middle of re-engineering its processes and its technologies to be a $50 industry, not a $100 industry.”
Many companies have moved to simplify the construction of rigs and platforms, big-ticket items that cut into profit.
In an era of higher oil prices, companies loaded up oil exploration sites with expensive custom-made extras. But they are moving forward now with stripped-down projects featuring standardized designs aimed at cutting costs.
BP, for example, sent a $20 billion Gulf of Mexico project called Mad Dog Phase 2 back for a rework. Instead of a giant specially built platform nicknamed Big Dog, the engineers used a smaller apparatus resembling one they were using on another field and reduced the number of wells by a third. When Mad Dog received the green light last year, the price tag had been cut to $9 billion.
Innovations by suppliers are also reducing costs. Aker Solutions, a Norwegian company that supplies the industry with undersea equipment like pipes and processing centers, is working on powering much of this underwater gear with electricity instead of traditional hydraulic fluid, a shift that could cut the costs of undersea projects by 30 percent.
Companies are also looking to data and technology to help extract more oil from the ground, and relying more on video conferences and streaming rather than sending staff members offshore.
The industrywide reassessment is readily apparent in the North Sea, a sprawling area dotted with hundreds of oil fields.
The area, whose fields were discovered half a century ago, has been a crucial contributor to the global energy supply. But output has declined sharply from its peak in the late 1990s, and the costs of extracting oil in the region rose steadily. When prices fell from above $100 in early 2014 to less than $30 just months later, the North Sea was among the most exposed of the world’s oil-producing areas.
“It is difficult when prices are really high, because you are really scrambling,” said Greta Lydecker, Chevron’s managing director for exploration and production in the region. “You are almost getting to a point where you are chasing things, and that is not a good place to be.”
When the price of oil dropped, the poor financial performance of many North Sea fields became impossible to ignore. Then, the cuts came.
Major investments were put on the back burner or binned entirely. That, in turn, sent rates plummeting for activities and services like drilling. Between 2014 and 2016, about a quarter of Britain’s oil-related jobs disappeared, according to the trade body Oil & Gas UK; in all, 120,000 people lost work.
More still needed to be done.
Companies began embracing data analysis not just to locate pockets of oil and gas deep beneath the sea floor, but also to improve production efficiency. When a problem crops up in an oil field, for instance, BP engineers can now pull up data on any of the company’s vast network of wells around the world to find solutions that have worked in the past.
“Before, what we would have had to do is scrabble through piles of papers and reports,” said Dave Lynch, BP’s vice president for reservoir development in the North Sea.
The company also began using that data to shut down some wells to gain more production from others, or to fine-tune the volumes of natural gas it injected into its fields to maintain pressure and pump oil to the surface. Mr. Lynch estimates that computer modeling has helped BP boost overall production by 3 to 5 percent in the region.
Operators are using technology to save on staff costs, as well. BP and Chevron are gingerly experimenting with taking some employees from offshore production platforms and having them do their jobs remotely on the mainland, a change that would cut the hefty costs of flying them on helicopters and providing them with food and other necessities.
They have also built centers in key parts of the world, including Aberdeen, that are linked by video to installations that are sometimes far at sea. Initially, staff members were skeptical and workers said they were effectively being spied on. In one case, staff members on a BP platform covered a camera with a sock.
“That’s all gone now,” Mr. Lynch of BP said. “Now, they realize the support they get from the onshore is really important.”
The scramble to slash expenses has already produced results.
It used to cost $97 a barrel in 2015 for big energy companies to break even, after accounting for expenses, investments and shareholder dividends, according to Biraj Borkhataria, an analyst at RBC Capital Markets in London. That figure is now around $55, a drastic cut, albeit one that still leaves costs higher than world oil prices. Major companies are well insulated from day-to-day moves in oil prices, not just by hedging against prices but also because they sell a wide variety of other energy products.
Despite the progress, plenty of challenges remain.
In the short term, traditional oil companies must face off against the shale energy industry in the United States. Not only is shale plentiful, but operators have also lowered costs by improving drilling routines and finding other economies of scale.
And in the longer term, cleaner energy sources like wind and solar are becoming more competitive with oil and natural gas.
But in the North Sea, the change has nevertheless been marked.
“We haven’t been in a profitable position for years,” Mr. Thomas of BP said. The company’s North Sea operations are “heading towards profitability,” he said, “for the first time in a long time.”