Cox: We have been able to keep our existing clients but, margins have been reduced

As the price of oil sits at half of what it was last July, energy services companies and midstream energy operators are starting to feel the knock-on effects of cost-saving and reduced capital spending in the E&P sector.

“We are seeing curtailment by some operators, both small and large, particularly those whose production is principally oil. Projects which were conceived during a higher price environment are now being shelved,” said Dwight Mahabir, CEO of construction-focused Damus Limited.

Jason Cox, Business Development Manager at Superior Energy Services Trinidad Limited, confirmed to EnergyNow that the company had seen a reduction in activity, with some projects delayed to 2016.

“So far, we have been able to keep our existing clients, but margins have been reduced. I expect this to continue in the medium term,” Cox said.

As some projects are postponed, remaining work, however small, has become increasingly important, according to Mahabir. “Much of the work we have grown accustomed to now is much smaller than we were used to.

Contracts we used to ignore have now become medium-sized projects, and we’re very happy to get them,” Mahabir said.

Apart from the shelving of new projects, the service sector has also been battling pressure from operators to renegotiate contracts and provide discounts.

Cox said his company had “experienced challenges renegotiating contracts,” but said several talks were ongoing. At Damus, Mahabir said a number of operators had written to the company seeking a reduction in rates on account of the low energy prices.

“In some cases, we have not been able to make the necessary adjustments and we have seen work fall off,” Mahabir told EnergyNow.

This trend could see operators opting for lower-cost contractors over proven quality, which is likely to backfire, according to Roger Packer, Managing Director of Tucker Energy Services Limited.

“History has proven when you go for the lowest bid, your actual final price ends up being more due to cost overruns. The industry needs to control costs at the source, they need to assess what really adds value, rather than trying to achieve same for less,” Packer said.

This difficult phase could also lead to widespread job cuts as companies struggle to balance the books.

“We have cut jobs throughout our global business and closed down facilities that are not as profitable. Locally, we had a small exercise where redundant employees were let go and some contracts were not renewed,” Cox said.

This extended low-price period also leaves companies in a difficult position with their financiers.

“It is very challenging for service companies, as equipment bought for a project has a payback period of 10 years,” Packer said. “But service contracts are traditionally only two or three. The value of contracts reduce in times of low oil price, but the bank repayments do not."

There is still no guarantee as to when energy prices will start to climb, and global market indicators do not show any signs of an imminent recovery.

Packer recalled a similar low-price environment more than 30 years ago:

“In 1981, Trinidad and Tobago had a fantastic service sector, world-class local firms, highly leveraged in order to grow rapidly within a boom market. When the market experienced a similar drop in oil and gas price that year, a lot of good companies went belly-up.”

Yet opinions vary on how best to defend against this service sector vulnerability in the future.

According to Mahabir, “Many of the service firms in Trinidad can be world-class companies, and many of us are. However, I think this difficult environment highlights the need for service companies in Trinidad to reach beyond our shores, beyond the region, and into the wider world, in order to ride local and regional fluctuations.”

In the context of wider economic plans for Trinidad, the role of the government has also been called into question.

“Rather than focusing on diversifying away from energy, the government should consider the benefits of strengthening the oil and gas industry in such a way as to allow our world-class service companies to enter the international arena.

Supporting Trinidad’s service companies into new markets would bring increased revenues, profits and taxes flooding back into Trinidad, in much the same way as we see international service companies taking their profits out of Trinidad," Mahabir said.

Cox, however, felt the onus was on service companies to pivot: “I don’t believe there is anything a government agency can do to support service companies.

Companies simply need to become more innovative in managing their business. Search for new markets and possibly diversify their services as a start.”