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BP, Total Tell Suppliers to Cut Costs Up to 40% Amid $50 Oil

Bloomberg.com

By Tara Patel and Fred Pals

April 6 (Bloomberg) — BP PlcTotal SA and Royal Dutch Shell Plc are asking oilfield service companies to cut project costs by up to 40 percent as the industry battles its worst slump since the mid-1970s.

Executives at contractors including Technip SACGGVeritas and Saipem SpA said Europe’s biggest oil companies are pressing for discounts. In response, they say they reduced the number of drilling rigs in operation by more than 25 percent and next will take oilfield vessels out of service, threatening jobs.

Projects in the Canadian oil sands, where reserves are hard to access, and marginal shallow-water fields are being trimmed, slashing the world drilling-rig total to a three-year low. The 64 percent plunge in oil from its July peak to close to $50 a barrel is deterring new investment and leaves the services industry, worth more than $60 billion, vulnerable as the order backlog shrinks.

“The pressure is much higher” than last year to make cuts, Thierry Pilenko, chief executive officer of Technip, Europe’s second-largest oilfield services provider, said in an interview at a Paris oil conference last week. “Total are talking about 20 percent, BP are talking about 40 percent, going back to the cost environment of 2004. That is much more difficult.”

The global rig count fell for five straight months, declining 7.4 percent in February to the lowest since April 2006, according to data published by Baker Hughes Inc.Operating rigs decreased 28 percent from 3,557 in September, the biggest drop since the last recession in 2001 and 2002.

Seismic Surveys

“We have some oil companies asking for renegotiation of existing contracts,” said Thierry Le Roux, chief operating officer of CGGVeritas, the world’s biggest seismic surveyor, in an interview. “Total is very vocal about it, and BP is very pushy.”

Oil service companies supply rigs, design production vessels, lay pipes and build refineries. Seismic surveyors such as Paris-based CGGVeritas gather and sell data about possible petroleum reservoirs under the sea floor in areas like the Gulf of Mexico, the North Sea and Brazil.

The market for engineering, construction and offshore oilfield equipment rose 22 percent last year, according to the French Institute of Petroleum, while the market for seismic services rose 10 percent. That contributed to cost inflation.

Financial Control

The CEOs of Shell, BP and Petroleo Brasileiro SA have all indicated tougher times lie ahead for contractors. Petrobras CEO Jose Sergio Gabrielli said in February he doesn’t want to “kill our suppliers, but we plan to squeeze them a lot.” Jeroen van der Veer, Shell’s CEO, and Tony Hayward, BP’s CEO, have both said they aim to cut project costs.

Total is renegotiating with contractors to drive down pricing and maintain upstream investments, Yves-Louis Darricarrere, the French company’s head of exploration and production, said April 2. “Costs will as a rule come down,” he told the International Oil Summit in Paris.

Total spokeswoman Phenelope Semavoine said reducing expenditure on projects is a priority and declined to give a specific target.

Oil Drop

“We have conversations with contractors to explain that since the oil price has dropped by $100 since last year, then we would expect to see that reflected in contractors’ costs,” said Robert Wine, a London-based spokesman at BP.

“I never thought construction costs would go up by a factor of two within four years,” Shell’s Van der Veer said April 2, adding that “if they come down, it is good news as well.” Shell’s press department in The Hague declined to comment further.

Repsol YPF SA Chief Operating Officer Miguel Martinez said last week Spain’s largest oil company is renegotiating existing contracts to cut costs by 5 percent, and aims to trim 10 percent on future agreements.

“It’s the same signal from all of them,” said Gudmund Halle Isfeldt, an Oslo-based analyst at DnB NOR ASA. “If the suppliers are listening to the signals, then they will renegotiate and reduce the costs.”

Technip gained 29 percent in Paris trading this year, making it the seventh-best performer of the 40-company Dow Jones Stoxx Oil & Gas Index, after losing 60 percent last year. Saipem gained 18 percent, rebounding from a 57 percent plunge in 2008.

Subsea Drilling

Paul Andriessen, an analyst at Fortis Bank in Amsterdam, said pricing pressure will need as much as 18 months to take full effect, adding oil companies are unlikely to achieve all the savings they seek, since the supply of services is declining while demand remains.

Technip forecast in February that sales this year would be 6.1 billion euros to 6.4 billion euros ($8.2 billion to $8.6 billion) at current exchange rates, down from 7.5 billion euros last year. It also predicted there wouldn’t be any “very large” subsea contracts this year, while there would be several large downstream contracts in the Middle East.

Fourth-quarter 2008 sales of Paris-based Technip fell to 1.9 billion euros from 2.1 billion euros, while orders shrank to 1.2 billion euros from 2.1 billion euros.

Saipem, Europe’s biggest oil services company by market value, has been bolstered by a record order backlog of 19.1 billion euros at the end of last year, following a 20 percent increase in sales for 2008 to 2.83 billion euros. That’s still not enough to insulate the Milan-based company.

Steel Market

“We have also some pressure from our clients to reduce costs, and I think there is room for efficiency improvements,” Saipem CEO Pietro Franco Tali said in an interview.

Tali said lower procurement costs on items such as steel could be passed along to clients without hurting margins, and he doesn’t expect a “dramatic” impact. “In terms of prices, we will be able to negotiate with our clients,” he said.

Cost-cutting by European companies is part of a global trend. Schlumberger Ltd., based in Houston and the world’s largest oil-services provider, posted a 17 percent fourth- quarter profit drop in January as exploration spending decreased.Halliburton Co., the second-biggest service provider, in January said pricing pressure will continue this year while Baker Hughes said the outlook for 2009 has “continued to deteriorate.”

That pressure is being passed down the chain.

“We’re doing to our supply base what our customers are doing to us, which is to drive cost out of the system,” Tim Probert, executive vice president for strategy and corporate development at Houston-based Halliburton, told the Paris conference. “We expect a lower-cost supply chain will give us significant benefits in 2009 and 2010. There have been some redundancies, particularly in North America.”

To contact the reporter on this story: Tara Patel in Paris at[email protected]Fred Pals in Amsterdam at [email protected]

Last Updated: April 5, 2009 18:01 EDT

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