Downsizing

Jake in January 2015:

I am not convinced the future of the oil industry lies solely with giant, complex mega-projects in very challenging locations.

 

With countries being able to raise their own financing and smaller, cheaper, faster projects becoming the norm, the lumbering giants which have dominated the industry for a century might find their opportunities drying up in the coming years as sleeker, more efficient companies provide the right mix of technology, delivery, and cost.

Such a move would be somewhat of a volte-face from the mega-mergers of the late 1990s which appeared to confirm leviathans exploiting vast economies of scale were the future of the industry.

In my opinion, the oil and gas landscape has changed dramatically in the last decade, and not to the benefit of large, private, western oil companies.

Tim Daiss over at Forbes last week:

Thai-state owned oil and gas company PTT will delay its long-term liquefied natural gas (LNG) buying plans and opt instead to make purchases on the spot market. The country inked long-term contracts with both BP and Shell in August 2015 to procure 1 mtpa from each oil company. At the time PTT was also in talks with Qatargas to extend a 2 mtpa 20-year supply deal already in place.

However, changing dynamics are in play. Total LNG output last year reached 250 mtpa, a new high, while prices for the super-chilled fuel have dropped in lock step with the plunge in oil prices and in concert with a supply glut that will only worsen well into the next decade.

[M]ore FSRU units (with cost advantages and time development advantages over onshore receiving and regasification facilities) will be built by smaller players to take advantage of lower prices and producers’ need to unload cargoes.Also, a shift away from large CAPEX intensive LNG projects to medium-scale and small scale projects will change the LNG sector of the future.

These smaller LNG projects will not have the huge financial burden of their larger counterparts and will be able to adapt more quickly to both changes in the market and to opportunities that these newer smaller more marginal buyers will bring.

The shift I talked about seems to be underway.  Until recently, many people believed that Shell’s giant Prelude FLNG project would pave the way for a whole fleet of them (assuming there wasn’t an almighty bang shortly after startup).  It might well be the case that, like the Tsar Bomba, the Saturn V, and the Antonov An-225, it will be the only one of its kind ever built.

“We’re thinking of renaming it Spruce Goose.”

Shell: the beta male of the oil industry

In August 2014 I wrote a post which started as follows:

Ever since Shell acquiesced to the Kremlin’s demand to surrender majority ownership of Sakhalin Energy in 2007 I have thought that western oil companies have fundamentally misunderstood the Russian mentality.  The perception at the time was that Shell believed by caving in on this issue, they would gain favour with the Russians and hence be in a strong position to participate in future projects.  Whether this was true or not (the alternative view is that Shell simply had no choice) the fact remains that in the 7 years since the transfer Shell has yet to participate in another major Russian oil and gas project.  Having been chatted up at the bar on Shtokman, and seductively passed a phone number on a napkin on Yamal, Shell lost out on both occasions to Total leaving them led on with promises of a third LNG train on Sakhalin and teased with whispers of an LNG project in Vladivostok.  To continue with the analogy, some people in Shell must be wondering when Madame Russia is finally going to put out.

Like that guy you were sorta buddies with in college who made out with a girl once and never stopped going on about her afterwards, but never read the signals that she wasn’t interested in a repeat performance and made a beeline for her whenever he saw her in a bar – even if she was busy necking a half-shaved biker some eight years her senior – Shell seems to be smitten by Russia:

The recent acquisition by the Royal Dutch Shell oil and gas company of its British rival BG Group creates new opportunities for further cooperation with the Russian energy giant Gazprom, Royal Dutch Shell Chief Executive Officer Ben van Beurden said Tuesday in a statement.

On Monday, Royal Dutch Shell sealed the $53-billion purchase of BG Group, expecting the merger to accelerate growth in the liquefied natural gas market and enhance its deep water extraction capabilities.

“In Russia, the Shell-BG combination creates new opportunities for our partnership with Gazprom, taking into account the strong positions that both of our companies hold in the global gas market,” van Beurden said.

This is getting embarrassing.  Look, there are synergies between Shell and BG which make the buy look like a sensible one insofar as gas is concerned, assuming the oil price (or more accurately, the gas price) doesn’t stay as low as it is now.  But why would any of this interest Gazprom? BG doesn’t operate in Russia, and it’s not as if Gazprom is struggling to offload any of its own gas through reasons that are not related to an unusually warm winter in Europe and raw stupidity on the part of its own management and the Russian government, neither of which a combined Shell-BG can do much about.  There is very little, if anything, that Shell-BG could offer that Shell didn’t have before the merger.

Since 2007 Shell has been pining like a lovestruck teenager at the elbow of Gazprom, thinking all he needs to do is convince her that he is a reliable, dependable, trustworthy boyfriend and she will see the light and drop the bad boys with the tattoos, criminal records, and motorbikes and settle for a future of middle class suburban living with cups of tea and occasional sex (missionary position only) between Laura Ashley sheets.

Like I said, it’s getting embarrassing. Where are Shell’s mates?  Shouldn’t they have dragged him away by now, and taken him to a strip-bar or something?  Naturally, like all good players, Madame Gazprom occasionally opens her legs from across the room just to drive poor Shell crazy and keep the goodies flowing:

In June 2015, Gazprom and the Anglo-Dutch Shell company signed a memorandum on the construction of a third technical line for a liquefied natural gas plant on Sakhalin Island off Russia’s Pacific Coast.

“I like you,” whispered Gazprom in Shell’s ear “you’re not like the other oil companies.  I feel like I can trust you.  No, no, don’t put your hand there,” said Gazprom, as Shell clumsily grasped her thigh with a trembling paw. Seeing Shell’s disappointment, Gazprom leaned close, placed a kiss on Shell’s flabby cheek with barely-concealed disgust, and said “we’re not ready yet, we should get to know each other better first” and got up to leave.  As she did so her phone beeped, and she saw it was a message from Rosneft: “ExxonMobil wants a threesome.  Bring the lube.”  As she walked away all thoughts of Shell, who was still sitting there with his eyes closed awaiting a French kiss that never came, were forgotten.

“I’m sure she’s just working late.”

Patrick’s posers

Last week Total’s CEO Patrick Pouyanne wrote an article in LinkedIn which is worth taking a look at:

Investments by the major oil companies are being scaled back in response to falling prices, which means they will no longer be able to offset the natural decline of currently producing fields.

This is a rather frank admission coming from the CEO of one of the major oil companies which has done just that.  But alas he doesn’t tell us why, if the above is true, his company nonetheless chose this path.

We already saw oil prices slump at the beginning of the century. The resulting concentration within the industry gave rise to today’s oil majors. Thanks to this consolidation, the majors are very solid. In the early 2000s, my predecessors – Thierry Desmarest and then Christophe de Margerie – built a group that now has a financial situation that allows us to weather cyclical ups and downs and stand firm when crude drops from $100 to $30 a barrel.

Perhaps, but nobody is out of the woods yet.  Yes, Total still exists as a company after a few months of oil around $30 per barrel, but there have been few bankruptcies among operators in this downturn probably because there is still quite some way to go.  Once the industry has indisputably swung from downturn to recovery, then perhaps claims to have weathered the storm might be warranted.  Right now, they seem a bit premature.

Total also owes its resilience to its integrated model, spanning from production to refining and chemicals to marketing. This is a strength. This year, our downstream operations, which we just finished restructuring in Europe, made the strongest contribution to our consolidated results. Who would have imagined that scenario three years ago?

This is true, and he makes a very good point.  ConocoPhillips split upstream from downstream in 2012 and are now paying heavily for it.

At today’s price level, we are preparing for hard days ahead in our industry. We are operating in a much more demanding environment in which the priority is no longer to increase volumes but rather to cut costs.

Again I find this admission to be rather startling: the corporate strategy seems to be dictated by the oil price.  Why can oil companies not increase volumes and control costs in a sensible manner across the whole business cycle?  Or if this is impossible, can they not save further costs by dispensing with the board of directors if company strategy can be set by an algorithm?

In 2015, we exceeded our cost reduction target of $1.2 billion without compromising our commitments as a responsible employer.

We’ve discussed this: you didn’t lay anyone off because for a French national champion and one of France’s largest employers it is politically unacceptable for you to do so.  I simply do not believe that the directors of a company which employs 100,000 people – far more than its much larger peers – carried out a professional review of its organisation and personnel and concluded that it should be the same during a boom, bust, and recovery.

Which raises the very interesting question: if other oil companies have had to shed staff to cut costs, how has Total managed it?  If it’s in efficiency gains, or improvements to how things are done, this means it was horrendously inefficient to begin with, and investors would be entitled to ask why this was allowed to happen during the boom.  Why couldn’t these $1.2bn of savings been made in 2012?  It can’t all be the result of renegotiated contracts taking advantage of cheaper market rates.  Alternatively, if the cost reductions have been made by simply not doing as much work – cutting back on maintenance, delaying projects, stopping research programmes – then these aren’t really cost reductions, as they are likely to have severe consequences on future production.  I suspect Heinz could reduce its costs by closing a baked bean factory, but its revenue would suffer thereafter.  By claiming $1.2bn in savings while boasting that nobody has been laid off while everyone else is shedding staff by the tens of thousands, Pouyanne raises questions that I am surprised nobody else is asking.  Of course, it might well be the case that the markets know damned well that Total can’t lay off thousands of Frenchmen and have factored that into the share price: provided the dividend is maintained, and it is, perhaps nobody cares about the underlying finances?

In 2015, Total was the most resilient major in an environment of declining oil prices.

I think Rex Tillerson might take issue with that.  And he’ll not be the only one taking issue with it if it transpires that this “resilience” has come at the price of future production in order to protect French jobs.

The comments beneath the article provide entertainment, also.  First up is somebody who is also unconvinced that this downturn is over:

If we’re not at the bottom of the cycle, we might really get to see how resilient Total and others are.

Next is a Nigerian employee of Total.  Nobody licks arse quite like a Nigerian licking arse:

I suspect he thinks this sort of toadying behaviour gets him noticed, and hence earmarked for promotion.  I also suspect that, absent local content laws, he would be inspecting hulls and subsea equipment up close with a wire brush instead of heading a department.  He’s not alone, either: here’s one of his compatriots making a similar attempt to get noticed:

Sire?  He’s been watching too much Game of Thrones.

A Schlumberger man steps in with some words of wisdom:

Indeed.  Mass wastage followed by mass panic across the business cycle isn’t much of a strategy, is it?

This chap has drunk the Total Kool-Aid:

Let’s hope Abhijit G. hasn’t rushed out and sold his kids’ school books to buy Total stock.

This fellow probably watches out for black helicopters as he walks to work:

Which is presumably why the giant pension providers don’t include golf driving teachers in the lists they hand to headhunters.  Still, he’s not quite as swivel-eyed as this next one, who believes a mysterious cartel is hoarding the world’s oil (as opposed to a quite open cartel producing most of it):

Finally, I hope I am not alone in finding Total’s rush to arse-lick Iran’s leaders less than two weeks after the nuclear sanctions were lifted somewhat distasteful.  Yes, I get that France is skint and Total desperate to access new reserves and the French make a big thing of not being judgemental like those awful AngloSaxons, but it would be nice if a company like Total would at least pay lip service to the fact that, despite the lifting of the nuclear sanctions, the regime in charge of Iran is still deeply, deeply, unsavoury.

“Do they still hang gays from cranes?”

 

Newfound pain

There’s a long but interesting article in Canada’s The Star on how the decline in oil prices has hit the city of St. John’s in Newfoundland.  It is interesting because although St. John’s does have an offshore oil industry, it is not a traditional coastal oil town in the manner of Aberdeen or Stavanger, and is often overshadowed insofar as the Canadian industry goes by Calgary.

Though Newfoundland is some 6,500 kilometres east of ground zero for Canada’s oil industry, the fallout from the swift and prolonged energy price dive has arguably hit the smaller, less-diversified province even harder than it has hit Alberta.

With few work prospects at home, especially after a moratorium on cod fishing in the 1990s put some 30,000 people out of work, Newfoundlanders looked west, where Alberta’s energy sector paid six-figure salaries to attract desperately needed workers.

Some 10,000 Newfoundlanders migrated to Alberta, poured hundreds of millions of dollars back home into their island communities. At the same time, Newfoundland’s own offshore industry took off, solidifying the island’s ties to the global oil price.

St. John’s has been hit with a double whammy: the town was not only dependent on its own oil industry, its fortunes were joined at the hip to those of Alberta.

The contents of a family’s life — an oven, a side table, old magazines — are unloaded from a truck into a yard overflowing with pickups, snowmobiles, motorcycles, boats and trailers at Fitzpatrick’s Auctioneers.

The lot has become a graveyard for toys that were easily afforded in past lives built on oil money, an elegy for Newfoundland’s crude-tied boom.

“It’s amazing. You’d never think what the price of oil could do,” lamented owner Blair Loveless after surveying the stockpiles.

“It’s sad. These people never thought the day would come where a barrel of oil would be below $30 (U.S.),” he said. “They were just living for the moment and they were making a huge amount of money and just thought it would continue on.”

The situation in St. John’s must be replicated from the aftermath of every boom in history, and not just the oil ones.  I don’t know how many people I saw squandering the money on toys of exactly the type described in the above article, with too little being put aside for the inevitable day the crash would come.  Some people are just rubbish with money, and would not save a cent if the boom lasted until politicians resigned in the belief their job was done.  But others…jeez, we even had a warning shot across our bows in 2008 when the price momentarily dropped and companies tightened their belts and started laying off.  The old hands told the younger ones to save as much as they could because the good times wouldn’t last forever, and thankfully a lot of them did: most bought property, which at least puts a roof over their heads while they’re unemployed.  But a lot didn’t:

Albert Wakely moved his wife and three young children from Newfoundland to Alberta in 2012 with the promise of doubling his income as a truck driver. “The money was calling,” he said.

“We had everything,” he says of his family’s life in Innisfail, a town in central Alberta.

“I had two vehicles, a quad, a ski-do, a mini-quad for my youngest son. The only thing we never invested in was a new home because we had all the intentions of coming home.”

Snowmobiles and quad bikes are great, and there is no reason why oilmen should not enjoy their wealth in any way they please.  But for Christ’s sake, you buy this shit after you’ve put away most of your earnings for a rainy day or bought a tangible asset! How many busts is it going to take before people stop listening to the Peak Oil bullshit and understand the boom times are a bonus, a stroke of luck, and not something to be relied upon?

Not that oil workers are alone in having not prepared for a downturn:

Just like the workers who bought new homes and toys with their newfound oil money, the provincial government saw the sudden influx of revenue as a chance to spend on sorely needed infrastructure and social programs. It did not set aside a rainy-day fund, as Alberta had.

“The reliance on oil — and I would argue to the expense of the development of other areas of economic potential — hasn’t set us up well for the situation we’re in now,” said Newfoundland’s newly elected finance minister Cathy Bennett.

She outlined the grim situation the government faces to a group of 100 St. John’s residents attending a pre-budget consultation in a high school gym last month.

Social programs.  What to do?

Citizens were asked to brainstorm how to shore up government revenues and cut expenditures, and how the province can innovate to diversify the economy.

The government has also asked departments to shave 30 per cent of their costs over the next three years, which could result in job losses.

Presumably the finance minister is going to shave 30% off her own salary if she’s going around asking citizens – many of who appear to have been a little wayward with their own finances – how to dig themselves out of the hole they’re now in.  Like the oil companies themselves, the local government has merely ballooned to fit the revenues flowing in: if the money was spent on infrastructure, it ought to still be there and costing little other than for maintenance.  I suspect it went on increased salaries and buying votes, as it has in every other government in history that stumbled into extra cash.  Yup: in defiance of John Maynard Keynes, these lot were running a deficit in the period 2012-2014 during the peak of the boom, and this article gives us an inkling what the cash was being spent on:

A new Progressive Conservative leader will be chosen at a convention July 5 in St. John’s. Under provincial law, an election must be called within 12 months after the new premier is sworn in.

Johnson downplayed questions about whether the budget lays the groundwork for a coming campaign. Opposition critics, for example, have long pushed the Tory government to make good on promised early learning and kindergarten programs.

The new budget commits $35.4 million to enhance such services and offer all-day kindergarten starting in September 2016.

Overall new spending is up a restrained 2.1 per cent from last year, Johnson said. It includes salary increases for government workers and $50.6 million over five years to convert provincial student loans into grants for those who qualify.

Johnson said moves to reduce student debt, freeze tuition for another year, increase low-income supports and improve early learning programs all reflect concerns raised in pre-budget consultations.

This almost makes buying snowmobiles and quad bikes sensible by comparison.  I wonder how that all-day kindergarten is looking now?  At least the kids will have plenty of cheap quads to play about on.

Even with the downturn biting hard, others still appear to be struggling with basic economics:

High-end executive rentals are sitting empty, or being rented for far less than they fetched when St. John’s was booming with oil-related business. “In the executive rental market, the inventory is triple what it was even two years ago,” said real estate agent and landlord Larry Hann.

He’s been trying to find a renter for a condo that rented for $4,800 a month in 2014, and is now priced at $3,500. It has been on the market for seven months.

I imagine there are thousands of landlords located in emptying oil towns scattered around the world who have taken full advantage of the oil boom to not learn the first damned thing about economics.  If you have a condo reduced from $4,800 to $3,500 and it’s been empty for 7 months reduce the bloody price until you get a tenant, you fool!!  I need to come up with a term for people who can only run a business during a boom period.

Home sales in St. John’s fell three per cent in December compared to a year earlier, while prices in the province fell 2.4 per cent to $267,093. Housing starts in 2015 were 20 per cent lower than the year before.

Either Canadian housing is seriously expensive or that average price is going to fall one hell of a lot more than 2.4%.  I suspect this figure has been pulled out of an estate agent’s backside instead of being what people are actually paying.  Is anyone still buying there?  If it’s like anywhere else, everyone will be hunkered down trying not to think of the words “negative” and “equity” and the government will be screwing over anyone who was sensible enough to save their cash by keeping interest rates low enough that foreclosures don’t cause them political headaches.

The party in St. John’s sounds as though it was good, but the hangover is hurting badly.  Unlike other oil towns, it probably wasn’t used to that kind of drinking.

“Dude, where’s my quad bike?”

Hypocrisy from Greenpeace, Double Standards from UK HSE

I am all for the right of citizens to protest anything they like, and consider it to be a cornerstone of a civilised society, but I’m not so happy about this:

Greenpeace has built a 10-metre high mock fracking rig outside Parliament, to protest the Government’s support for the controversial drilling method.

The rig, accompanied by lorry and drilling sounds and featuring a flare which fires up every hour, was erected to coincide with the opening of a public inquiry into Cuadrilla’s proposals to frack for shale gas at two sites in Lancashire.

“We have installed a life-like fracking rig and drill at Parliament Square to show them what people in Lancashire and beyond will have to endure if so-called communities minister Greg Clark forces fracking on a reluctant nation.”

Let’s take Greenpeace at their word and assume the rig is “life-like” (I assume they mean “representative of a real rig”).  When an oil company wants to erect and operate a rig, they must carry out noise, emissions, and flaring studies to ensure that they are not only kept beneath predetermined levels but also that they are kept as low as reasonably practicable (ALARP).  This is expensive and time consuming, and must be performed to the satisfaction of the UK HSE in advance of the operations starting.

So why does Greenpeace get an exemption to operate their rig, in the middle of London no less?  Now it may be that the Greenpeace rig is about as realistic as a Jason Statham film, but that can only be determined after the appropriate tests have been carried out.  And I am quite certain, given how long these things take and how much they cost, they haven’t.

Protests are fine.  Deliberately causing noise and flaring emissions which may harm the public is not, and ought to be as unacceptable for Greenpeace as it is for an oil company.  These protestors should be hit with a class action lawsuit.

HSE rules don’t apply to the virtuous.

Igor another presentation for you

A post by Streetwise Professor reminds me that International Petroleum Week has just taken place, and once again Rosneft’s Igor Sechin played the role of conference comedian, this time by blaming “robots” for the collapse in the oil price.  Go and read the whole thing.

Veteran readers may recall I wrote a post on Igor’s amateurish presentation at the 2015 International Petroleum Week which I described as follows:

What follows is a rambling 20-page presentation cluttered full of data, graphs, and comparisons with no clear message other than – I think – “the oil price should be higher”.

Igor also seemed to be somewhat obsessed with US shale which, one would have thought, is fuck all to do with the CEO of Rosneft.

So what’s changed?  Not much by the looks of things (in case it gets removed, there’s a copy here).

Like last year, the entire presentation is made up of jumbled graphs which purport to show whatever Igor Sechin and his pals in Rosneft want them to show, and are of the sort which cause audible groans in the audience who is being asked to sit through them.  Detailed graphs are fine when you’re a reservoir engineer doing a presentation on production profiles; a CEO of a giant oil company might want to consider something a little more dynamic, but then Sechin is a product of the USSR which practically defined itself by dreary, monotonous collection of data and statistical analysis.  Only the data turned out to be as wrong as the analysis, and the whole system collapsed.

Slide 1 is titled “Oil prices are abnormally low”, under which a graph is displayed which shows oil prices are pretty much where they were between 1979 and 2003.   Why the last 10 years of record prices ought to be considered “normal” isn’t explained.

Capture

Slide 2 is the same rambling disclaimer we saw last year (“Information herein has been prepared by the Company…The contents of this presentation have not been verified by the Company”).  Which is fine, only the disclaimer is probably supposed to come just after the title page, not after the first slide of the presentation proper.  In other words, nobody bothered checking it.

Slide 3 shows that the explosive growth in US shale stopped in 2015.  Attendees may have felt entitled to ask why Sechin, who is the CEO of a Russian oil company, feels the need to discuss US shale.  Hopefully by the time they’ve seen that no less than 4 of the next 5 slides are on how US shale is such a terrible investment, they will have woken up to the fact that Sechin is at this conference less in his capacity of CEO of Rosneft than a shill for the idiotic Russian state policy of believing everything is about them versus the USA.

Having harangued the audience on US shale, Igor treats them to his take on the state of the global oil industry, covering Saudi Arabia, Iran, OPEC, global prices, and a host of other points via cluttered graphs which make your eyes hurt.  Why Sechin believes he can add any new analysis here is anyone’s guess.  If there was anyone still awake at this point, they would be made of sterner stuff than I.

Igor then shows an updated version of the same slide he presented last year, which I commented on as follows:

“We have colossal reserves but after decades of blithering incompetence have still not got our act together.  But don’t be fooled by those Yanks and their unfathomly high production rates, they’re not sitting on as much oil as we are.”

So nothing has changed there, then.

Igor finishes up with a slide which appears to say that the key to Russia’s oil industry is favourable taxation of existing, depleted deposits and the development of the offshore continental shelf.  This slide is telling for several reasons.  Firstly, it contradicts the preceding slide which shows Russia has vast, untapped reserves: surely these have some role to play in the future?  Secondly, there is no mention of what the future tax regime is likely to be: if Sechin was to provide anything of value during his presentation, it would surely have been to clarify issues like this (he is, after all, a rather influential figure in the Russian government). Thirdly, this appears to be more of a plea for the tax regime to favour Rosneft’s current position, i.e. the operator of old, existing fields and the continental shelf.  Why he is showing this to an audience of oilmen in London instead of the Russian government I don’t know.  Fourthly, there is no mention of the elephant in the room that is Russia’s inability to develop its reserves despite a decade of record prices and the sanctions currently preventing Rosneft from pursuing its partnership with ExxonMobil for Arctic developments due to the military adventurism of the Russian government of which Sechin is very much a part.

In short, Igor has served up the same bullshit he did last year,, which I described thusly:

This is an amateurish effort consisting at best of muddled, confused messages with no clear purpose and at worst blatant political posturing.

What is annoying about this is the room was probably stuffed full of suits hanging on his every word, not because he said anything remotely sensible or interesting, but because he has stumbled into a position of considerable power and influence which in itself attracts legions of sycophants aiming to curry favor.  Igor, being a product of both the USSR and Putin’s Russia, will no doubt interpret the fawning comments of arselickers as evidence of his wisdom.

People were charged up to £2,640 to attend International Petroleum Week.  If there is one thing I would like $30 oil to bring about, it is an end to companies wasting their shareholders’ money by sending people to listen to garbage spouted by the likes of Igor Sechin.

“Igor! That was even worse than last year!”

Firefighting

If a farmer receives a call from a neighbor that one of his sheep has escaped and is standing in the road, he will go out, fetch the sheep, and put it back in the field where it belongs.  Most likely the farmer will then make a tour of the hedgerows and fences to see where the sheep got out, and close up the hole when he finds it.  Certainly, if he gets two such calls about his sheep standing in the road he will make damned sure he finds the hole in the fence.

That’s because farmers are sensible folk.  Oil and gas managers?  Less so.  If you approach any random manager in a modern oil and gas organisation – let’s say a Procurement Manager – and tell him a purchase order for a vital spare part has been stuck in his department for the past 6 weeks without going anywhere, he will probably ask you for a few details, find the purchase order himself, and then get it issued.  And then he’ll sit back and enjoy the warm glow of satisfaction he gets from a job well done, a problem solved, and make a mental note to include this episode in the weekly report under the heading “Achievements”.  If he does this often enough, it might even warrant a mention on his CV.

What the Procurement Manager will rarely do is find out why this PO was stuck in the system for 6 weeks and take steps to ensure it doesn’t happen again.  In other words, he’ll keep letting the sheep escape onto the road and only see the problem as being this one sheep on the road right now.  You can probably imagine what the farmer’s neighbor will think of him after the third phone call.  It will be much the same opinion that an engineer will have of the Procurement Manager.

The Procurement Manager will not solve the root cause of the problem for one of two reasons:

1. He knows what the problem is, but lacks the knowledge, authority, or courage to solve it.  Usually this takes the form of a possibly useless subordinate who is not being managed properly, but who enjoys continued employment in the role.

2. He doesn’t realise that managing a process for the purpose of achieving a desirable outcome is his reason for being employed.

A lot of managers are former engineers or other junior staff who have shown technical competence or, more usually, served time or are of a certain age.  The problem with this method of selecting managers is that it ignores the fact that management is more about personality than technical ability.  Engineers tend to focus intently on details, and the better engineers do this more than the not-so-good ones.  However, the latter often have a better grasp on the context in which calculations are taking place and a better appreciation of external factors not directly related to their own discipline, which is why most project engineers are former discipline engineers who found they either weren’t very good at calculations or got bored doing them.

What the oil industry rarely does is select youngsters who show signs of having a personality more suited to management than technical work – of which an ability to see the broader picture is but one of several – and assign them small, fairly trivial management tasks in order for them to gain experience in managing a process with the aim of achieving certain goals.  One of the greatest lies told to young people in the oil industry is that you need experience to be a manager.  This is blatantly untrue: whilst experience is required to manage a complex situation, very little experience is required to manage something simple.  When I was in my teens I had a part-time job in a sawmill, and my normal duties were to sweep floors, carry boards about, fill up trucks with diesel, and be the butt of everyone else’s jokes.  But occasionally the foreman would say to me something like:

“Jake, every time the delivery truck comes in our yard is blocked while it unloads, and we can’t get the forklift into the main shed.  If we could shift those racks somewhere else, maybe by getting rid of that old diesel tank, the truck could park over there and we’d still be able to get in and out.  Can you sort something out?”

And I’d take a few measurements, run around for a bit looking at various things, and come up with an idea of how I thought it could be done.  This was better than pushing a broom about!  Then I’d run it by the foreman and he’d make a few suggestions, and then tell me to get on with it.  I’d ask the other guys for help when I needed it (e.g. from the forklift driver), telling them I’m reorganizing the yard for the foreman, and in a day or two get it done.  I didn’t have any experience in arranging the yards in a sawmill, but what I did have was the competence to run a small job and complete each task as necessary without continuous instruction.  The foreman recognized I had this ability, and was probably glad he didn’t have to take one of his skilled operators off the machines to do it.  I didn’t realize it at the time, but in doing these things in that sawmill I was engaged in management: the managing of a process, or sequence of tasks, to achieve a specific set of goals.

I tell the above anecdote to demonstrate that experience is not required to manage something: competence is.  But the oil industry is obsessed with a belief that management is something that must be earned only via strict technical competence or age, and as such denies its young employees the chance to hone their management skills on simple projects.  Instead, they wait until they are approaching 50 before catapulting them into the Project Manager position on a nasty, brutal project in some seriously challenging environment like Kazakhstan and expect that they will learn and apply fundamental management concepts on their first try.  Almost none of them do.  Half of them were never suited to management anyway, and the half that might have been were never given the chance to learn in a more forgiving environment.

The former engineer who is out of his or her depth will almost inevitably retreat into their comfort zone of details at the expense of the overall goal, leading to attempts to solve every immediate problem which arises, which is known as firefighting.  Firefighting is so common in the modern oil and gas industry that it is noticeable only by its absence, otherwise it goes unremarked as business as usual.  Given how much money is spent on management training courses in the oil and gas industry, it is perhaps surprising how few managers actually understand the fundamental principle that they are supposed to manage the process by which tasks get completed, not carry out the tasks themselves.  The clue is in the job title.

Farmers: generally not fuckwits.

 

Another major comparison

Now that each of the supermajors has turned in their 2015 Q4 and preliminary full-year reports, it is time for some commentary.

ExxonMobil:

IRVING, Texas – February 2, 2016 – Exxon Mobil Corporation today announced estimated 2015 earnings of $16.2 billion compared with $32.5 billion a year earlier.

Exxon forecast capital spending at around $23.2 billion this year, a 25 percent drop from 2015.

Summary: Their profits have halved last year so they’re cutting CAPEX further for 2016.  They don’t need to lay anyone off because they’re still making a cool $16bn and weren’t overstaffed to begin with.  As several other commentators have pointed out, ExxonMobil seems to be the only major that considered the full business cycle and hence was prepared for the inevitable downturn.

Shell:

Royal Dutch Shell has become the latest oil major to reveal the hefty toll the sharp slump in crude prices has taken on its earnings as it posted an 80 per cent decline in full year profit to $3.8bn.

The company on Thursday reiterated plans to slash capital investment, dispose of $40bn of assets and cut 10,000 jobs.

Summary: Their profits are rapidly going down the drain so they’re laying off another 10,000 people.  Some of these will be BG employees caught up in the merger which people are beginning to seriously doubt makes sense at anything less than $60 per barrel – twice today’s price.  Shell’s claim that it is the “world’s largest oil company” must be looking a bit weak with their 2015 profits being a quarter of ExxonMobil’s.  The lean times have shown Shell’s corporate strategy to be extremely shaky when the oil price is not at historical highs.  If the oil price doesn’t pick up in 2016, we might see a wholesale clear-out at the top and large-scale restructuring.

Total:

French oil major Total has reported a 20% increase in annual net profit to $5.1bn, compared with $4.2bn a year earlier.

As with other oil firms, the rise in net profit came thanks to its oil refinery business, which saw a 96% increase to $4.9bn in the year.

Total is probably the surprise package here, having posted greater profits than their much larger peers Shell, Chevron, and BP.  With the profits from Marketing & Services growing by 35% to add to that impressive 96% increase in Refining & Chemicals profits, this justifies the decision of Total and the other  majors not to follow the ConocoPhillips route of separating upstream and downstream into separate companies.  However, Total’s upstream profits fell by 55% in 2015 and the CEO Patrick Pouyanne announced in January that they would not be cutting staff as the other majors have been doing.  This then raises the question of how Total intends to cut its costs: if the strategy involves selling off productive assets to raise cash and simply not bothering to invest in new projects for a year or two, then the impressive results of 2015 might have come at a high cost in terms of future production.

BP:

BP is to axe another 7,000 jobs after reporting an annual loss of $6.5bn (£4.5bn), the worst in its history.

Bob Dudley, BP’s chief executive, said investors who were selling their oil company shares were overreacting and had overlooked BP’s strong cash flow.

Summary: Full-on panic, leading to moronic statements from the CEO.  Since the Macondo disaster BP has adopted an aversity to risk which has paralysed decision making in the company at all levels.  Added to this has been BP’s flailing around in Russia over the last decade, with Dudley being hounded out of the country, the debacle over the failed TNK-BP/Rosneft Arctic exploration pact, and culminating with the absorption of TNK-BP by Rosneft and BP’s partnership with the state-owned behemoth.  BP may feel they have been treated unduly harshly by the US authorities over Macondo, but with this episode drawing to a close it is unlikely that this is what is fuelling investors’ concerns.  More likely, they have been as confused by BP’s strategy as I have, and harbor serious doubts that Dudley – whose judgement in Russia would surely have precluded him from the CEO spot had not it been prudent to appoint an American at the time they were pissing crude oil all over the GOM – is the right man to lead the company through this difficult period.  Dudley needs to go, sooner rather than later.  The new CEO then needs to clarify exactly what BP is doing partnering Rosneft, a company that is wholly dependent on the whims of Igor Sechin and Vladimir Putin and is under sanctions from the United States and European Union.

Chevron:

Full-year 2015 earnings were $4.6 billion compared with
$19.2 billion in 2014.

Summary: Numbers-wise, Chevron is in a similar situation to Shell.  However, Chevron already announced it was laying off 7,000 staff after the 2015 Q3 results and thus far has not indicated it intends to cut any further.  As my previous analysis showed, Chevron has far fewer staff than Shell and so perhaps they feel their numbers are now at an appropriate level.  Although not as lean as ExxonMobil, and far smaller on every measure, it appears Chevron’s fall in profits is due solely due to the decline in the oil price and does not point towards a muddled strategy, overstaffing, and a corporate structure ill-suited for the times.  Chevron just needs to hunker down and ride out the downturn.

“Fooled you!”

Roundup

From the comments over at Tim Worstall’s:

I happen to do a little work for a company started by a South African. He bought a British company and pitched up at a board meeting (chaired by a peer) where they were discussing which particular knob should be on the ethics committee or the audit committee. His contribution was “who’s going to be on the fucking profit committee?”

Which serves nicely to illustrate the point I made here.

The Daily Mail has an article on the North Sea drilling rigs that are sitting idle in the Cromarty Firth.  Go and look at the pictures.

Also via Tim Worstall, one Simon Diggins, a failed Labour parliamentary candidate in the last British General Election, writes this in a letter to The Guardian:

I’m sure your readers will have picked up that the 3% tax that Google has apparently paid is the usual extractive industries rate paid to developing countries for their exploitation of those countries’ natural resources.

I sent Mr Diggins an email asking for the source of that 3% figure he is citing as the tax rate on extractive industries in the developing world, but he would not elaborate unless he first got to know me.  Ooh-er, missus.  So I’ll assume he’s plucked it out of his arse.  Here is a list of crude oil royalty rates around the world (hint: it’s higher than 3%).  Page 411 of this .pdf shows a Nigerian profit tax rate of between 65-85%.  Which is why a collapse in the oil price has put Nigeria in so much trouble.  If governments were enjoying a mere 3% rate on oil production, they’d not be as sensitive to fluctuations in the price, would they?

Joanna Lillis has a good article in The Economist regarding the dire state of Kazakhstan’s economy and the collapse of their currency, something which has been somewhat overshadowed by the same problems in neighbouring Russia. Choice quote:

The president keeps chanting an all-in-it-together mantra, but the calls for austerity by this head of a fabulously wealthy clan may wear thin.

Last week I went to another investor conference of a large oil company, similar to the one I wrote about here.  They gave a presentation in which they announced their E&P operations lost almost double-digit billions in 2015 but cheerfully told us that 2016 is expected to see shortfalls of “only” half that assuming the average oil price is $50 for the year.  Heh.  Most of the board was assembled on the stage and took questions from the audience, which they responded to with boilerplate corporate guff which did nothing other than give the impression they are in charge of a giant, rumbling machine, the workings of which they don’t really understand, and desperately pulling on random knobs and levers in the hope things will improve.

“If we just fiddle with that dial at the top…”

Gordon’s ghost

This is bullshit:

David Cameron will fly to Aberdeen on Thursday to announce a £250m package to prop up the North Sea oil industry, the first stage of an infrastructure investment for the city.

The prime minister will promise a new “oil and gas technology centre” in Aberdeen to fund future research, including into innovative ways to extract oil and gas.

His visit comes as the North Sea struggles against slumping oil prices, which have left many of its companies facing big losses. The industry is seeking £3bn in funding.

The last 10 years has seen Aberdeen’s wealth grow exponentially to the point that it became the most expensive city in the UK for house prices outside of London and a large portion of its residents became very wealthy with more than a few becoming staggeringly so.  A cruise past the offices of the oil and gas companies, the engineering companies, and service providers would show the car parks full of Audis, BMWs, Mercedes, Porsches, Jags, and Bentleys, enabled by soaring wages and full employment of those who work in the oil industry.

And now they need a bailout?  Fuck them.

They’ve made the same mistake as Gordon Brown when he infamously declared that he’d abolished boom-and-bust: he thought the good times were here to stay and he could go on spending money with gay abandon.

These companies that are now seeking £3bn in funding – which will be paid for in part by the taxation of British people working minimum wage jobs – ought to have managed their affairs taking into account the cyclical nature of the industry and implemented sensible reforms and sound business practices during the boom instead of feathering their own nests, bloating their office overheads, and lording it over everybody else as deeply unintelligent individuals found themselves presiding over multi-million dollar enterprises that their mate happened to own.

As I said: fuck them.

The companies should be allowed to go bust: directors, managers, and employees can remortgage their houses if they want to keep them going, but they shouldn’t be given a red cent of taxpayers’ money.  Inevitably some innocent workers will find themselves in financial strife while their former directors and managers retire into the sunset, but this is the regrettable and unavoidable consequence of people having believed the good times would never end and putting their faith in chancers and incompetents who ought to have been hounded out of the industry at the end of a long, sharp, pike.  If this lesson can get learned, and learned well, then it will be worth it.

“I hear ya.”