Unusually bearish article from Angela McDonald (AFR) who usually promotes Santos at every opportunity. (Today) Oil firms set to chase hard on costs The petroleum services sector is largely unfamiliar with having to manage a dramatic slump in oil. Photo: Bloomberg ANGELA MACDONALD-SMITH As seasoned commodity market watchers are keen to point out, share prices always overreact to spot commodity prices, whether that’s on the way up or on the way down. In the case of crude oil, no one believes that $US46 a barrel will last for ever, even if there’s still no conviction yet among analysts or industry that prices have bottomed. What is becoming clear though is the industry is set for a prolonged period where prices are well below the $US80 to $US100 a barrel range companies became accustomed to over the past few years. That is pointing to a radical downward shift in cost structure for the services sector. But the suggestion from Santos chief executive David Knox this week that Santos could make as much money when at $US50 a barrel oil as it would at $US100 looks optimistic. While oil industry service costs are sure to be severely squeezed, other expenses, such as financing and labour costs, appear to offer little flexibility. “Clearly history shows that in times of falling oil prices costs can follow them down,” says Mark Samter of Credit Suisse, who has become something of a pain in Santos’s side in recent weeks with his bearish assessments on the company’s valuation. “That said, a high quality LNG project might have cash costs of $US10 to $US20 a barrel. Even in a highly unlikely scenario where costs halved, it doesn’t do much to offset a $US50 a barrel fall in revenues,” Samter says. It’s a live debate as to by just how much costs can be cut in the petroleum services sector, but certainly, the sentiment around is there’s plenty of fat to be taken out. Deloitte’s national director of oil and gas, Geoffrey Cann, believes that an expectation of a 40 per cent cost cut is not unreasonable, given the sector has not been particularly vigilant on supply chain costs in the good times over recent years. HARD LESSONS TO BE LEARNED The petroleum services sector is, after all, largely unfamiliar with having to manage a dramatic slump in oil prices; in contrast to the lessons learned the hard way in the coal and iron ore sectors, which have already lived through a slump in their respective commodity prices and have shed thousands of jobs as a result. Cann points to extensive wastage of services resources, including 40 per cent of “standing-around time” on any given day among contractor workers on some petroleum projects. He says serious moves to tackle the problems are already afoot, with a tripartite working group set up a few months ago to look at how engineering and construction engineering and construction costs can be reduced across the three adjacent LNG projects on Curtis Island in Gladstone. But others are less bullish at possible cost improvements, with Citigroup putting the scope for reducing capital expenditure and operating costs in the local oil and gas sector at 15 per cent. That opportunity is open primarily to new projects, rather than those such as Santos’s $US18.5 billion GLNG project in Queensland which has been mostly built during a high-cost period and so have locked those in. Citi sees a scenario where future projects could achieve similar returns in a low oil price environment to a world where prices are at $US90 a barrel, assuming a circa 15 per cent reduction in long-term oil prices can be matched by operating and capital costs savings. In a breakdown of capex savings for a typical LNG project, cost cuts on labour are put at zero to 5 per cent, partly due to unionised local labour. Materials and equipment savings could be in the 25 to 30 per cent range or up to 40 per cent on energy costs. Other costs such as financing could come down by 15 per cent, while engineering and construction management could fall by a quarter. In the months ahead, oil and gas producers will be going flat out to try to achieve those savings and more. The Australian Financial Review BY ANGELA MACDONALD-SMITH Angela Macdonald-Smith Angela is chief of staff, energy and utilities, based in our Sydney newsroom.
Posted on: Wed, 14 Jan 2015 18:34:45 +0000
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