After commodity prices crashed in late 2014, many service companies around the world, and in Trinidad and Tobago, revised prices downward. According to energy research firm, Rystad Energy, pricing power in the service industry will be strengthened as orders are expected to increase across the supply chain.
BP’s Chief Economist, Spencer Dale, in a one-on-one interview with EnergyNow indicated that prices for services may not see the rebound that many industry players anticipate.
According to Dale, the prices in 2014 reflected that demand was slowing and therefore there was excess capacity which caused margins to be squeezed. He indicated however that those margins cannot be squeezed too tightly, or it will result in failures in the service chain which he said is in no one’s interest as it will “ultimately affect the company’s ability to expand when things pick up again”
The Chief Economist said, however, that BP’s Chief of Upstream has tried to adopt a model where two-thirds of the price reductions would be maintained.
Dale said that the approach is not simply to maintain the squeeze but rather to re-engineer the project and reengineer what is being asked from the contractors. An inevitable part of the upstream over time is moving to greater standardisation. As you move in that direction, it allows for cost reductions throughout the supply chain, which is a good thing for service companies as well as for oil companies, he said.
He went on to say, “If you think about US tight oil (shale oil), it has transformed the industry in many ways in terms of speed and the responsiveness to prices. But it has also changed the vocabulary of upstream where its productivity, efficiency gains, standardisation and repeated manufacturing processes. Dale indicated that introducing lean manufacturing techniques into the upstream is a key trend which is observed in BP and in other large oil and gas companies.
He added that the efficiency gains experienced over the past few years aren’t because the supply chain was inefficient in the past. Dale indicated that it was more what was being asked of the service companies and the efficiency gains from changing what was asked of the service companies and also greater levels of standardisation.
At BP, he said, “The level of inventories that were being held as a proportion of output was really high relative to levels of inventories you would see in other parts of the economy.
He added that taking lean manufacturing techniques and applying them has led to production and efficiency gains within BP and it is the intent for it to spill over to the service companies.
Dale visited Trinidad in September 2019 to present the BP Statistical Review of World Energy to government and private sector representatives at the Hyatt Regency Hotel. The presentation focused on key global trends in the energy sector including LNG trends and scenarios on the energy transition.