Oilfield service company Baker Hughes reported that its count of U.S. oil rigs was down to 635 for the week of 12 June: a 60% decline from one year ago. The number of natural gas rigs was down 30% in the year to 221. The company's rig count outside North America was down 14% in the year to May. A separate analysis this week from the U.S. Energy Information Agency found that earnings of globally integrated oil companies declined 54% in the year ending in the first quarter of 2015, with refining contributing more than half of profits compared to an average contribution of 15% between 2011 and 2014.
This confluence might seem to augur dark days for capital projects consulting, but a deeper look suggests a more Panglossian outcome.
Steady as she goes. While oil & gas companies want to curtail their capital spending, in the short term they are loath to stop projects in process, especially the large and complex sort that are S&O consultants' bread and butter.
Productivity imperative. Rather than stop them, owner companies are trying to eke savings out of their projects in process. While accurately measuring it is tricky, productivity in construction is notoriously abysmal. Projects are getting more complex as exploration moves into more remote geographies and employs more sophisticated technologies and both upstream and downstream activities contend with heightened regulatory scrutiny. Coordinating construction workers and supply chains in harsh and geopolitically precarious conditions is no easy task; companies complain about getting in the order of three hours of actual work for every ten that a worker is onsite: fertile ground for S&O consultants' lean, procurement, and risk capabilities. S&O consultants have to date only scratched the surface of the addressable capital projects market, so this newfound attention to productivity affords an opportunity to increase penetration.
A healthy outlook for long-term spending. Notwithstanding plateauing or decreasing energy consumption in advanced economies, the International Energy Agency forecasts steadily increasing global consumption over the next couple of decades driven by emerging economies. The agency estimates a need for $40 trillion in spending on energy supply through 2035, with approximately 60% targeted at maintaining current production. To the extent companies do cancel some new projects in the short-term, the net effect is likely to be a deferral rather than reduction of capital spending that contributes to healthy consulting demand for the foreseeable future.
In addition to spurring a hunt for productivity gains in the construction of new capital projects, early evidence suggests the challenging economic environment is driving companies to get more out of their existing operations. Another analysis this week by the U.S. Energy Information Agency looked at producer price indices and found declines over the year to May in the rates charged by oilfield drillers, support services, and other suppliers, suggesting producers are streamlining operations and beefing up their procurement capabilities: a potential knock-on opportunity for S&O consultants.
Nathan Simon is the lead analyst for Kennedy's strategy and operations management consulting service lines.
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