Structural & political as the offshore crisis may be, a large part of the answer lies in firming up your organization & spending money only where needed.
There are two ways of facing a crisis – treat it as a danger and try to minimize its affects, or see it as an opportunity to be pursued. The question now is whether the offshore sector takes the opportunity that this crisis is giving to rethink business models and make the sector robust against the threat of shale oil.
2017 is the year for rethinking strategic direction. Many of the large shipping companies will seek mergers to obtain size and increase their economies of scale distancing themselves from the "crisis" and driving them towards "opportunity". Smaller companies can obtain the same benefits as the larger companies if they seek to establish new alliances giving way to possible synergies. One example of new alliances is the recently initiated cooperation between Deloitte and OSM. While OSM delivers economy of scale to the operations, Deloitte can help in bringing quality to the transition from in-house to external operations. Deloitte has developed a methodology that ensures that the transition itself takes 10 weeks while OSM’s operational experience allows the company to offer a reliable understanding of the cost picture in operation. These effects together allow the customer to reduce his perceived risk.
Following the financial crisis of 2008, the offshore industry picked up incredible speed with the first signs of recovery in late 2009, through the bonanza of 2011–2013 until Chinese New Year in late February 2014 saw the coffers of the oil majors shut with a sobering thud. Even so, many suppliers and industry experts understood that the sharp rise in offshore development costs and the subsequent fall in oil majors' cash flow had to trigger a cost reduction, nobody saw the end of the "Call On OPEC" mechanism that plunged the industry into a recession during the Summer of 2014.
Most suppliers thought they could get away with some minor cost cutting measures to show their good will and then the oil majors would be back to chasing more barrels at $110 apiece. What very few in the offshore sector had picked up on, however, was the sharp growth in the onshore shale production in North America. Since 2008, US shale production rose from practically nothing to four million barrels of oil per day in 2014. With continuing oil price levels of $110, the production could theoretically have reached 20 million barrels within the next ten years. This was probably the reason why OPEC decided not to reduce their production consequentially leading to price drops due to oversupply.
It took some time for the supply industry to understand that the situation was changing and in the second half of 2014 when Statoil began to discuss recovery towards 2020, few people wanted to listen. The news was just too bad. Now in 2017, many still hope for a speedier recovery but 2020 probably seems less improbable.
The offshore supply industry is in turmoil with overcapacity, lay ups, layoffs, industry restructuring and asset speculation happening on a broad scale. The drilling sector is seeing interest from investors that had deleted the word "drilling" from their vocabulary. However, asset play is not going to be enough to create a sustainable competitive edge for the offshore sector. Cost has come down through massive lay-offs with more than 250,000 jobs having disappeared. To rebalance the market, steel must disappear and scrapping will be necessary to make rates come back up to a normal level.
Is the offshore sector taking the opportunity to reinvent itself and rethink its strategies? Oil majors are doing just that by reducing bureaucracy and shortening project execution cycles. Manufacturing companies are doing that by investing in new and more cost-efficient technology. Service providers should be doing that by looking at their business processes, costs, and their understandings of the real value they provide their customers. The service providing sector must reinvent itself, become significantly more cost effective and focus on creating real value for the customer in order to stay competitive.
Editorial Author: OSM CCO, Oddvar Solemsli