CERAWeek: Oil tool makers say upstream discounts unlikely to climb high

HOUSTON — Though the industry expects operational and construction costs for oil-production projects to fall up to 40 percent this year, prices for tools and services probably won’t crumple that much, a panel of energy experts said Tuesday.

Construction and operational costs for upstream projects have more than doubled since 2000, and the most recent industry downturn in 2008 saw costs dip only 10 percent, according to IHS.

In the last six months, oil-company breakeven levels have only declined 5 percent to 6 percent, and aren’t expected to fall nearly as far as producers hope, said Pritesh Patel, director of research at IHS, in a panel during the second day of the weeklong IHS CERAWeek energy conference at the Hilton Americas-Houston.

“There are huge expectation that costs will come down 20 to 40 percent, but in reality our expectations lower than this,” Patel said.

It’s hard to find room for 20-percent discounts on equipment when labor and specialty steel costs don’t change rapidly, said Douglas Meikle, president of valves and measurements at Cameron International, a Houston oil equipment manufacturer.

“We’re a publicly traded company,” he said. “It’s hard for us to find that kind of number.”

Mario Azar, CEO of Siemens’ oil and gas arm, said it isn’t possible to add 25-percent price reduction from his own manufacturing firm’s suppliers.

“The industry has gotten into expensive habits – a lot of overdesign offshore,” Azar said, adding oil companies need to consider cutting “wish lists” their engineers bring into designs even as they ask for supplier discounts. “You can only cut costs so much, or the future is given away.”

The two oil equipment executives said continued spending on research and development, even through the ongoing downturn, could help bring down costs over time as the industry figures out how to make its tools more cheaply. Meikle said his department in Cameron is spending 60 percent more on research and development this year, compared to last year, in hopes it can find “creativity that can be unleashed on a project.”

For years, rising construction and operational costs had cut into the oil industry’s returns, especially on costly offshore projects. Even with oil above $100 a barrel, oil-company returns had slumped well below what they were when prices were lower, said Nick Lowes, vice president of oil and gas consulting at IHS.

Lowes said two thirds of 200 major oil projects tracked by IHS aren’t profitable at current oil prices and the current cost structure.

Meilke said he sees that as evidence the oil producers need to become more disciplined in spending habits. In recent years, “over-designing” of offshore projects has made manufacturing much more expensive, a problem that could be eliminated if the industry worked to standardize its equipment, he said. That could also help make manufacturers and other suppliers more efficient.

“There’s a heck of a lot of engineering time making a non-standard product,” he said. “I’m an engineer, and engineers love to engineer, but somewhere you have to draw the line and say that’s enough.”

The industry has in recent years tried to move toward standardizing how pieces of offshore equipment are designed and built, but it’s easier said than done, Lowes said.

“Engineers like to hang on to their designs, and when you try standardization there’s always a lot of push back,” he said. “So it’s going to be a huge challenge, but it’s a challenge I believe the industry is taking on.”