OIL'S FUTURE: COST-CUTTING CONTEST

The forces have been at work for the better part of a decade. But the consequence, the shape of the petroleum industry of the future, is just now coming into focus. While the future becomes a contest for capital among governments that own world-scale oil and gas reserves, for private companies it will be a contest of cost control. The rule applies to companies large and small. Those who manage costs the best will prosper. Those who do not won't last.

Nov. 18, 1991

3 min read

The forces have been at work for the better part of a decade. But the consequence, the shape of the petroleum industry of the future, is just now coming into focus.

While the future becomes a contest for capital among governments that own world-scale oil and gas reserves, for private companies it will be a contest of cost control. The rule applies to companies large and small. Those who manage costs the best will prosper. Those who do not won't last.

The emphasis on cost control is nothing new, of course. But some observers thought the squeeze had run its course. Not so. And the process has two particularly gloomy sides.

MORE LAYOFFS

One is pressure for more work force reductions. As this year's record shows, the layoffs haven't ceased. And as an article in the API Report asserts, they need to continue (see p. 49). More than that, the layoffs need to continue in ways that don't eradicate the sciences and professions on which the business ultimately depends.

The other gloomy side of the squeeze is the U.S. government's willingness to hold open the door as exploration and production operations march away. Contrary to the popular mood, world-scale upstream work remains to be done in the U.S. The problem is that the U.S. body politic won't allow it to proceed. For what work can be conducted, environmental costs and liabilities have no apparent end.

But the company cost squeeze has its rosy side, too. It's called technology. It has revolutionized upstream petroleum operations and, more slowly, traditional gauges of industry health.

Crucial parts of the revolution were on display last week at the Society of Exploration Geophysicists annual meeting in Houston: the post-spaceage equipment and practices that give not just geophysicists but also geologists, engineers, and-yes-investors an increasingly precise, three dimensional picture of the underground. Oil companies were there as well. They were there because in the past half-decade or so they have gained confidence in geophysical techniques as front-line weapons in the battle against costs. Companies now spend hundreds of thousands of dollars shooting seismic surveys and processing, interpreting, and reinterpreting the data in order to determine where not to drill multimillion-dollar dry holes. When they do make hole, they employ a host of drilling, completion, and production technology advances that improve efficiencies and cut costs even more.

What all this means is that the old calculus no longer works. Reserves additions are not the same function of the rig count, or of completion totals, or of footage drilled, that they used to be. It takes less drilling to find and develop reserves than it did just a few years ago-much less. More to the point, it also takes fewer dollars.

SMARTER AND CHEAPER

The petroleum industry of the future will involve companies with fewer staff professionals than before. An already developing industry of technology boutiques-small teams of researchers and technicians able to develop and apply specialty technologies under contract-will grow and prosper. Working smarter and cheaper than ever, large companies will find large reserves outside the U.S. Smart, technology-oriented independents will find ways to make small, heretofore undetected oil and gas deposits in the U.S. pay.

The future belongs to flexible, mobile, cost-conscious professionals, fiercely dedicated to technology. For those attached to practices of the past, who consider the upstream petroleum business a contest of completion numbers, the future was yesterday, and the rest is history.