Speaking at the 37th Howard Weil Energy Conference held in New Orleans this month, Schlumberger Chairman and CEO Andrew Gould offered some thoughts on the oil and gas business in a receding world economy. For Gould, ‘We are entering a period that will be very different from the last five years [..] of spectacular growth for Schlumberger.’ The world has turned from one of stretched supply to faltering demand. Demand, governed by economic activity, is the overriding driver of oil and gas prices. Until the world economy stabilizes, we can expect demand to reduce further and this, more than OPEC production cuts, will govern prices.
Gould went on to analyze the consequences of all this for the industry in 2009 and beyond. Recent cost increases mean that only conventional oil and current deepwater projects remain profitable at today’s prices. Heavy oil, enhanced oil recovery and ultra-deepwater no longer cut it, let alone shale oil or coal to liquids. Much Canadian tar sand activity been cancelled and some national oil companies have slowed their heavy oil projects. The price decline has also affected exploration and the credit crunch is accelerating the decline in activity.
What does this all mean for Schlumberger? WesternGeco, Schlumberger’s seismic arm, will be badly affected by the reduced exploration spend, although the unit will be cash-flow positive in 2009. One ‘bright spot’ is in data processing where reverse time migration and full waveform inversion are ‘creating new markets.’ Deep-water activity is relatively unscathed and generally, Schlumberger’s measurement-based technologies should remain in demand. Gould also sees positives in Middle East natural gas and resilience in Latin America and parts of the Far East.
In anticipation of the slow down, Schlumberger is cutting its head count by some 10%. The company is reducing or cancelling many non-essential projects and has removed some levels of management. However, to prepare the company for when activity picks up, some investments need protecting. Paradoxically, in view of the staff cuts, the first of these is people. Schlumberger has recruited some 11,000 engineers in the last five years so cutting back will be relatively easy. The plan is to maintain a modest recruitment program and to ‘manage’ the retirement of a large number of baby-boomers.
Schlumberger also plans to protect its investment in R&D, the ‘fuel’ for the technology of tomorrow. Opportunistic corporate acquisitions may be envisaged especially as valuations are now ‘falling more into line.’
The silver lining on the cloud is the effect of the downturn on supply. Already, cutbacks have reduced short-term production capacity by anywhere up to two million barrels per day. A longer period of low spending will mean a dramatic fall off in capacity and, once demand recovers, a steep recovery in price. Gould did not say when this is going to happen, ‘Judging the moment demand will turn is still almost impossible—your estimate is as good as mine.’
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