North Sea equilibrium, and the hidden winners.

Everything tries to find equilibrium, and the rollercoaster that is the price of oil is no different.  I’d warrant most people concerning themselves with oil markets and oil matters are well versed in the complexities of supply and demand, so therefore need no further sermon on how the excruciatingly complex mathematics of the free market will inevitably – and lastingly – dictate oil price recovery; the tinkering of individual nations and groups facilitating only temporary rallies.

On those rallies and price plateaus, there’s no need to continue to obsess on OPEC gatherings either.  That’s because unless the organisation collectively decide to choke back flow rates en-masse and for a considerable period of time, then those supertankers that float low in the sea with the weight of millions of tonnes of crude oil will take a fair while to clear.

But clear they will upon market rebalance, at the point of supply and demand equalising.  Successfully predicting that turning point is what makes rich men all the richer, and will play out as normal with the expected corporate level winners.

The essential question on the lips of industry employees though, centres around whether the changes to terms and conditions and lost perks of the job are permanent.  But why should you concern yourself with the trivialities of well-paid men and women at sea?  Well you should, but first let me first explain what has happened at the level of your average offshore Joe, or your 9 to 5 office worker employed within the industry.

Oil companies – the core wealth distributors to service companies – were very quick to react to falling oil prices in late 2014 and early 2015.  Labour cuts can always draw in the financial belt another notch, and labour was public enemy number one.  During the fat years of 3 figure oil prices labour conditions blossomed in the North Sea and elsewhere to include 2 weeks on and 3 weeks off rotations, expensive satellite television packages in every cabin, acceptance of sloppy attendance statistics, generous salaries three times that of the average onshore Joe (against the UK average), and a multitude of small perks that were well covered by healthy corporate profits.

Pet projects from oil company offices overflowing with people and passengers filtered down to service companies, who then had the financial clout enabling them to bargain salaries individually and capture more experienced and reliable professionals from rivals.  Wages rose for certain service company employees both onshore and offshore, often spectacularly above inflation for well performing individuals.  New hires were a triviality with decisions on recruitment devolved well below corporate level, and when that happens you’d better be prepared to open a notch back up on that financial belt.

But that belt made of straw creaked, groaned, and then burst wide open, the oil companies a victim of their own exploration and production successes, oversupplying the market with seas of oil.  The weight the industry can carry in a long-term time of plenty is without rival.  The only rival to the gluttony is the industry’s ability to forget my opening keynote word: equilibrium.  The perception was that the good times would always be here, and the shock waves when the cuts came were universally felt.  When it became apparent mass redundancies and rig stacking was playing out across the globe, panic copycat strategies were given the nod in boardrooms from Houston to Aberdeen.

But what isn’t apparent to the outside world of the mainstream press and their patrons is the depth of cuts to salaries, terms, conditions, and perks.  What is almost invisible to anybody is how lasting it will be, and who wins from the ashes of the carnage.

So if you’re fortunate enough to have some hard-earned cash to invest, and fancy a flutter on an oil related company in the betting shops of New York, London, or Tokyo, then consider this…

Offshore and onshore, the depths of cuts and the attention to detail regarding the targets are truly staggering.  Salaries have been cut and redundancies have been made, as reported widely.  Rigs have been stacked to a widely known historic low.  Day rates for thousands of engineers and specialists have been slashed by 25% or more across a plethora of firms, a little less reported.  Performance related bonuses are gone.  2 weeks on and 3 weeks off rotations on platforms are being withdrawn for equal time rotations more often used on drilling rigs, which slashes platform manpower costs dramatically.  Expensive satellite television packages are now replaced with free to view television.  Steaks offshore every night like the good ol’ days?  Rare (excuse the pun).  Subsidised canteens in company offices?  No.  Free coffee vending machines?  A £10 kettle from Tesco suffices.  Travel allowances to and from heliports?  Slashed.  Your name stitched on your workshop or offshore coveralls?  Use a sharpie.  There are many, many more examples, but you get the picture.

As a moderately intelligent person, I ponder this: once taken away, how long does it take to get those conditions back?  My honest answer to myself?  Most likely a long time, if ever.  If you’re a part of the oil deal you’ll have heard the mantra of “we’re sorry we have to make cuts and will endeavour to return to pre-downturn conditions upon market and company recovery”.  Is that likely?  It depends upon your company and their speciality, but in general the optimistic outlook is foolish.

But one person’s loss is another person’s gain, and that is the essence of what I’m conveying to whomever has read this far.

If, say, you were a gambler, and you were pondering a punt on the recovery of the oil industry, what section of the industry is going to come out streamlined, toned, and ready to dominate?

Objectively, I’d take a flutter on companies who operate multiple offshore platforms in previously expensive basins because what they’ve done to cut costs to increase margins has been brutally impressive.  That is, the oil companies themselves.  Reducing your offshore workforce by two fifths whilst continuing to pump the exact same amount of oil has already returned the oil producing companies to equilibrium, way ahead of the service companies who will fight amongst themselves tooth and nail to thieve and plunder and entice the surviving experienced engineers and specialists required to keep the supermajors happy.

And then, as time has proven, we’ll all forget the whole thing and start again.

———-

Note: If you’re a little confused about the difference between platforms and rigs then “Offshore oil and gas installations: an introduction” may help clarify your thoughts.

Also… like and follow at www.facebook.com/offshoreinsider

Related Offshore Insider articles:

North Sea Oil. The UK’s biggest blunder?

Offshore oil and gas installations: an introduction.

Uk government makes an actual loss from North Sea oil. Wow.

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