Oil and gas contractors offer options to value-destroying headcount cuts, says DNV GL

Contractors in the oil and gas sector could be the solutions operators and services firms are seeking when faced with the challenge of making deep cost cuts whilst retaining some capabilities for future development.

This is according to ‘A new reality: the outlook for the oil and gas industry in 2016’, a recent study released by DNV GL, which shows that whilst many firms are responding to the immediate pressures of the oil price slide by cutting headcounts, they are placing future development at risk by doing so.

Graham Bennett of DNVGL warns that continued mass redundancies are only going to compound future skills shortages within the sector: “Many companies are laying off lots of people, stopping projects, and significantly cutting back on research and development.

“The operators can weather the low oil price storm for some time, but the supply chain will suffer far more, and there is a risk of a permanent loss of capacity in the supply chain if low prices persist.”

Just under a third (31%) of over 900 oil and gas professionals worldwide reported that their company is set to prioritise reducing its labour force as a means of imposing stricter cost controls in 2016, whilst 51% predict overall industry headcount will decrease in 2016.

For ContractorCalculator CEO Dave Chaplin, the approach adopted by firms presents an opportunity to contractors: “Firms are now faced with the challenge of minimising costs in the short-term whilst simultaneously attempting to drive long-term value.

“Hiring contractors can ensure that oil and gas companies reduce costs by consistently adapting the size of their workforce to align with demand, ensuring no unnecessary overheads are incurred, whilst also making sure that they have the required skills available in order to progress operations.”

Slashing headcounts is not the only means of reducing costs that firms are adopting. With 73% of respondents bracing their companies for a sustained period of low oil prices, almost nine in ten (88%) consider cost-reduction to be a high priority in 2016.

The survey indicates that operators are seeking to reduce costs by around 20-30% on average, 10-15% of which is expected to come from supply-chain savings, suggesting contractors who are willing to be more flexible when negotiating rates may find more success acquiring contracts.

“Like everyone else, we’ve taken a very close look at our cost base,” highlights Kristin Færøvik, Managing Director of Lundin Norway and survey contributor. “For us, a large part of this has been about getting the best deal from our contractors.”

Whilst some contractors may still struggle to source work, not all firms are taking such a heavy handed approach to staffing.

Chief Economist at Statoil Eirik Wærness points out that many firms are still actively looking to hire the specialists they don’t have in-house. This is effectively no change for many contractors, with advanced and hard-to-source skills.

“It could also be the catalyst for workers with these niche skills who are currently employed to take the leap into contracting,” concludes Chaplin.

Published: Monday, February 8, 2016

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