From Boom to Bust — How Big Oil is Reacting to the Market Downturn

In late 2008 when I was down in Houston speaking at an event, I had the chance to meet with a couple of folks from Eirô Consulting, a boutique firm specializing in technology and process consulting in the Spend Management arena. Focused exclusively on the oil and gas sector, Eirô delivers a range of procurement and related B2B strategy, technology implementation, integration, supplier enablement, technology development and project management solutions. Since that initial meeting, I've had the chance to keep up with one of the firm's partners, Tim Morgan. Besides being a quick wit that was the source of one of my more humorous posts on the Dallas economy, Tim's shared some useful observations with me about how oil and gas companies appear to be reacting to the downturn in general.

In a recent back-and-forth online dialogue, I asked Tim for some specific anecdotes based on the under $40 a barrel environment. Tim commented that operators have started to ask suppliers for cuts of between 10-20% from their current contracts to take effect immediately, and sourcing departments are burning the midnight oil at the moment.

Elsewhere in the oil and gas sector, companies appear to be preparing for a sustained downturn (or at least a sustained period of lower prices). Tim notes that "in the manufacturing area, most companies appear to have a strong level of back-orders that should keep them busy thru to Q3 but their management has instructed employees to get their cost structures in order now because 2010 will be difficult. As a result we have seen a number of customers in this area delay strategic initiatives until there is more visibility." And "within the Operator community we've certainly seen a lot of major Capital Projects being cancelled and a fair number being delayed (approx 30% of original planned spend cancelled or delayed). Most Operators have planned the remaining projects on $35/barrel oil."

Since Eiro Consulting focuses almost entirely on projects tied to cost reduction or cost improvement, Tim suggested to me that they've been able to weather the downturn well so far. But I've heard that other service and solution providers in the oil and gas area are not as fortunate -- especially those focused outside of the Spend Management arena. From another consultant, I heard that Calgary, a city known for oil and gas booms and busts, is most certainly on a down cycle and the number of consultants and contractors flying in on Mondays and leaving on Thursdays has dropped considerably. Given this anecdote and the ones that Tim shared with me, the challenge I would issue to procurement and operations executives in the oil and gas business is how can they make $40 a barrel feel like $45 barrel oil (from a shareholder and earnings perspective). I would suggest given my limited knowledge of the market that this might be a stretch goal, but given the adolescent state of Spend Management programs inside many companies in the oil and gas value sector (ExxonMobil excluded), anything is possible.

Jason Busch

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