Monthly Archives: January 2014

Oil Industry Starts to Squeeze Costs, Wages

Thursday, January 30, 2014
by  Reuters – John Kemp

LONDON, Jan 30 (Reuters) – Cutting the cost of everything from salaries and steel pipes to seismic surveys and drilling equipment is the central challenge for the oil and gas industry over the next five years.

The tremendous increase in exploration and production activity around the world over the last ten years has strained the global supply chain and been accompanied by a predictable increase in operating and capital costs.

When oil and gas prices were rising strongly, petroleum producers and their contractors could afford to absorb cost increases.

But as oil and gas production have moved back into line with demand, and prices have stabilized, the focus is switching once again to cost control.

“Operational excellence,” a euphemism for doing more with less, is back in fashion and set to dominate industry thinking for the rest of the decade.

Spending Discipline

Paal Kibsgaard, chief executive of Schlumberger, one of the largest service companies, has been emphasising “smart fracking” and other ways to raise output and cut costs for two years.

Speaking as long ago as March 2012, Kibsgaard warned: “In the past ten years, exploration and production spend has grown fourfold in nominal terms, while oil production is up only 11 percent.”

“In this environment, we believe our customers will favour working with companies that can help them increase production and recovery, reduce costs, and manage risks,” he added.

Schlumberger’s website and those of its main competitors Halliburton and Baker Hughes all prominently feature technologies and processes intended to cut costs, such as dual-fuel diesel-natural gas drilling and pumping engines.

It is just a small example of profound industry shift from an emphasis on increasing production to controlling spending.

Issuing a shocking profit warning on January 17, Royal Dutch Shell ‘s new chief executive pledged to focus on “achieving better capital efficiency and on continuing to strengthen our operational performance and project delivery.”

On Thursday, the company cut its capital budget for 2014, and announced it was suspending its controversial and expensive Arctic drilling programme.

Shell is catching up with peers like BP and Chevron , as well as perennially tight-fisted Exxon, in promising to stick to a tighter spending regime and return more value to shareholders .

The problem is not unique to oil and gas producers. Miners like BHP Billiton, Rio Tinto and Anglo American have all axed projects and pledged to tighten capital discipline after costs spiralled out of control.

Megaproject Madness

The worst over-runs have been on so-called megaprojects – investments costing over $1 billion, sometimes much more. In fact, the bigger project, the worse the cost overruns and delays have tended to be.

Pearl, Shell’s enormous gas to liquids project in Qatar, is now regarded as a success, but was seriously delayed and went wildly over-budget.

Other megaprojects like Chevron’s Gorgon LNG in Australia and the Caspian oil field Kashagan – which is being developed by an industry consortium including ENI, Shell, Total, Exxon and Conoco – have been similarly late and bust their original cost estimates.

It is convenient, but wrong, to blame poor project management for all the days and cost overruns. Some decisions have been flawed, but on projects of this size and complexity, at least some errors are to be expected.

Megaproject managers in 2013 were not, on the whole, worse than in 2003. Unfortunately, the economic and financial environment has become much less forgiving. When projects start to go wrong it has proved much harder to limit the delays and damage to the budget.

By their nature, megaprojects are so big they strain the global construction and engineering supply chain and pool of skilled labour. Megaprojects create their own adverse “weather,” pushing up the cost of specialist labour and materials worldwide.

Attempting to complete even one or two megaprojects with similar characteristics at the same time can strain the global supply chain to the limit. Attempting to complete several simultaneously is a recipe for severe cost escalation and delays. The multi-commodity boom over the last decade created a “perfect storm” for the megaproject industry.

While there is not an exact overlap, massive offshore oil fields like Kashagan, LNG facilities like Gorgon, floating LNG platforms like Prelude (destined for Australia), gas to liquids plants and even simple onshore shale plays like North Dakota’s Bakken, are all competing for the same limited pool of skilled engineers, construction workers and speciality steels.

The result has been a staggering increase in costs and wages. And once a project falls behind, there is no slack in the system to hire extra workers or procure additional or replacement components to get it back on track.

Supply Chain Responds

Rampant inflation and delays have been worst on megaprojects because they require a much higher proportion of very specialist components and the supply chain is least-elastic.

But even simpler projects like shale oil and gas have been plagued by a rapid rise in costs as they stretch the availability of drillers, rigs and pressure pumping equipment, as well as fracking sand, fresh water and guar gum.

Between the end of 2003 and the end of 2013, the number of employees engaged in oil and gas extraction in the United States increased by 70 percent, from 117,000 to 201,000, according to the U.S. Bureau of Labor Statistics.

Soaring demand for specialised workers has produced an entirely predictable surge in wages.

Employees in North Dakota’s oil, gas and pipeline sectors were taking home an average monthly salary of $9,000 in the fourth quarter of 2012, and staff at support firms were making an average of more than $8,000, according to the latest data from the U.S. Census Bureau.

Their colleagues in Texas were doing even better: average salaries in the oil and gas extraction industry were over $15,000 per month, and $11,000 in pipeline transportation.

That made them some of the best-paid employees in the United States. Only financial services employees in New York ($28,000), Connecticut ($25,000), California ($17,000) and a few other states were routinely making more.

Rising wages and other prices were the only means to ration scarce workers and raw materials. But they were also the only way to attract more workers and supplies into the industry.

Extreme Cycles

It takes a long time to train new drillers, petroleum engineers and construction specialists, and give them the experience needed before they can assume positions as experts and team leaders.

Similarly, the expansion of specialist construction facilities and manufacturing firms for items like oil country tubular goods takes years; and companies will only expand or enter the industry if they are convinced the upturn in demand will be durable rather than fleeting.

While the boom in oil and gas prices dates from around 2003 or 2004, the big expansion of exploration and production spending started much later, around 2006 or even 2007, and it has only filtered down to the labour pool and the rest of the supply chain much more slowly.

It is the long delay between an increase in demand for oil and gas, an increase in production and exploration activity, and an expansion of the whole supply chain, which explain the deep cyclicality of the petroleum industry and mining.

Extreme cyclicality is hard-wired into oil, gas and mining markets. Companies like Shell which have tried to ride through the cycle by ignoring short-term price and cost changes to focus on the long term have eventually been compelled by their investors to fall into line.

In the next stage of the cycle, oil and gas prices are set to remain relatively high but are unlikely to rise much further. For exploration and production companies, increasing shareholder value therefore means increasing efficiency and bearing down on costs, including compensation and payments to suppliers and contractors.

For the supply chain and oil-industry workers, capacity and the availability of skilled labour will continue to expand, while demand is set to stabilise or taper off. Major oil companies and miners have already cancelled some projects. Costs, wages and employment will fall, or at least start rising much more slowly.

Source

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Deep Water Drillers Could Plunge 35%, Barclays Says

The past 12 months have been tough for drillers like Transocean (RIG), Seadrill (SDRL) and Diamond Offshore (DO)–and the stocks don’t look to be finding a bottom anytime soon.

Barclays James West and Zachary Sadow explain:

Our Base case assumes dayrates continue to slide with UDW dayrates dropping to $475k and total average rates dropping 16% from our bull case. We think this is the most likely outcome as we continue to believe the market still needs to work through excess capacity and that conditions will get worse before they get better. In this environment, we anticipate utilization would drop modestly as well. Overall, we expect EPS to be below our 2015 EPS estimates by 38% (ex-HERO) and EBITDA to be 26% below our 2015 EBITDA estimates. Companies with larger portions of fleets derived from older assets would be the most impacted. Under this scenario, all companies in our coverage universe (except Rowan (RDC)) are subject to share price depreciation with an average pullback of 35% (-28% ex-[Vantage Drilling Company (VTG)]). At these levels, we would expect companies with higher leverage levels to be more impacted and see potential for financing events as equity values contract.

Under this scenario, Rowan could gain 2% while Seadrill could plummet 52%, Diamond Offshore could plunge 45%, Transocean could fall 24% and Atwood Oceanics (ATW) could drop 15%.

Read more: Here

Deep Water Drillers Could Plunge 35%, Barclays Says – Stocks To Watch – Barrons.com.

Karl Rove and the GOP Socialists

Crossroads, Chamber attack Reaganites.

By Jeffrey Lord – 1.2.14

Happy New Year.

It’s war.

While America was celebrating the holidays, the Wall Street Journal ran a page one story the day after Christmas headlined as follows:

GOP, Business Recast Message
Republican Leaders, Allies Aim to Diminish Clout of Most-Conservative Activists

The story said this right up front:

Meanwhile, major donors and advocacy groups, such as the Chamber of Commerce and American Crossroads, are preparing an aggressive effort to groom and support more centrist Republican candidates for Congress in 2014’s midterm elections.

Translation?

Karl Rove (i.e., architect of the American Crossroads SuperPAC), the Chamber of Commerce, and the Washington GOP Establishment have declared war on the Reaganite conservative base of the Republican Party.

Welcome to the 2014 election.

An election which, by all accounts, both historically and in terms of the specifics of President Obama’s sinking ratings, should be a winner — a big winner — for the GOP.

Unless.

Unless there is a deliberate, willful attempt to sabotage the GOP from within. Using the GOP Establishment as a launching pad to ensure that Reagan-style conservatives — the base of the Republican Party — are defeated by Establishment, statist Republicans. Republicans who will in turn so anger the GOP base that the base simply refuses to turn out in November. Thus handing President Obama and the statist forces of Big Government a victory they should never have had and in fact would be unable to earn on their own.

Or? Worse?

The GOP Establishment wins under the ruse of being… honest, they promise, cross-their-hearts-and-hope-to-die… conservative. And then they do the inevitable… the usual… GOP version of the Socialist Deal. Being “realistic”… seeking (Margaret Thatcher’s hated word) “consensus.”

Harrumph, yada yada yada and all of that.

This isn’t rocket science.

Let’s be candid here, shall we?

This is the latest round in the GOP civil war that has been ongoing for decades.

And, while that WSJ story does not mention Mr. Rove by name, the name of American Crossroads — the Rove-created SuperPAC — is mentioned front and center in this story.

We have discussed Karl Rove and American Crossroads before (here and here).

Back in February of 2013 the New York Times ran this story on Mr. Rove’s Crossroads group, describing it as follows:

The biggest donors in the Republican Party are financing a new group to recruit seasoned candidates and protect Senate incumbents from challenges by far-right conservatives and Tea Party enthusiasts who Republican leaders worry could complicate the party’s efforts to win control of the Senate.

…The group, the Conservative Victory Project, is intended to counter other organizations that have helped defeat establishment Republican candidates over the last two election cycles.”

The Conservative Victory Project, which is backed by Karl Rove and his allies who built American Crossroads into the largest Republican super PAC of the 2012 election cycle, will start by intensely vetting prospective contenders for Congressional races to try to weed out candidates who are seen as too flawed to win general elections.

The backlash against American Crossroads was considerable. The very fact of the New York Times piece signaled the Reagan base of the GOP — these days called the Tea Party — that the GOP Washington Establishment was out to undercut Reaganites as the war against GOP statists picked up steam.

Now that 2014 has arrived, the WSJ story indicates the war on Reagan conservatives by the Bush/Ford/Rockefeller wing of the GOP is on again in earnest. Over at Breitbart, Tony Lee reported another aspect of this story, headlined as follows:

Karl Rove’s Crossroads Reloading Against Tea Party

Reports Lee:

Even though Karl Rove’s American Crossroads brand has been damaged after the group declared war against conservative candidates, the group will reportedly try to influence the 2014 midterm elections by bullying campaigns and creating groups that, on the surface, do not seem to be affiliated with them.

According to the New York Times, Crossroads “appears to be testing” its “new approach” in Kentucky. The Conservative Victory Project, the group formed to take on conservative candidates, has stayed out of Kentucky’s Senate primary between Senate Minority Leader Mitch McConnell (R-KY) and Tea Party challenger Matt Bevin. Instead, a group called “Kentuckians for Strong Leadership” is curiously backing McConnell while getting most of its cash from Crossroads donors. It is “legally separate from Crossroads”; but Stephen Law, the president of Crossroads, sits on its board, and the two groups share a treasurer.

Crossroads may set up “similar groups in races in which its brand may be less appealing to voters or donors.” The Times notes that this is an approach Crossroads may have to take because Rove’s organization has been so tarnished among the conservative base that candidates fear donors will not contribute to any group associated with him.

In other races, Crossroads has been threatening Senate candidates, saying the group and its affiliates will not support them if they accept support from other super PACs. According to the Times, Law warned a Republican West Virginia Senate candidate (Rep. Shelly Moore Capito) that if her campaign formed its own super PAC, Crossroads would not offer it support.

So even if it appears on the surface that Mr. Rove and the GOP Establishment have taken a pass on primary X, in fact Crossroads, the Chamber and other tentacles of the GOP Establishment may be well present and accounted for by another name. Actively seeking to sabotage conservative candidates exactly as the Breitbart story pinpoints in detail with the Kentucky Senate race.

Let’s be clear.

This isn’t some petty squabble over the personality of candidate A versus candidate B. This is decidedly not about the ineptness of, say, Missouri’s Todd Akin (whom we urged to withdraw after his rape nonsense). Notice that none of the losing moderate candidates from 2012, whether Mitt Romney at the top or in various Senate or House races, are being cited by the Establishment as problems.

This is about whether the Republican Party will abandon its Reagan/conservative base — the base that elected Reagan in two landslides, Reagan’s vice president (running as Reagan’s heir) in a 1988 landslide, the Gingrich Revolution in 1994 and made John Boehner Speaker of the House in 2010 — to become Republican socialists, a paler version of the Obama/statist party. Obama Lite. Unwilling not only to challenge the President’s left-wing agenda but insisting on acceptance of that agenda — just a cheaper, better managed version of it.

This is exactly how the nation got into its $17 trillion debt in the first place — not to mention repeated GOP defeats at the polls — with too many Republicans using their time in office not to keep pledges of limited government but rather to grow the government. And the debt and deficit that went along with it.

As we have noted before, this fight is a mirror image of the battle that occurred in Britain between the late British Prime Minister Margaret Thatcher and the “wets” — moderates — of her own British Conservative Party.

After the Tories lost the 1974 elections to Labour, in 1975 as she prepared to challenge Edward Heath — the Gerald Ford of British Conservatives — Mrs. Thatcher penned a column for the Daily Telegraph that said, in part, this:

Indeed, one of the reasons for our electoral failure is that people believe too many Conservatives have become socialists already. Britain’s progress towards socialism has been an alternation of two steps forward with half a step back…And why should anyone support a party that seems to have the courage of no convictions?

Americanize Thatcher’s point and this is exactly the problem posed by Mr. Rove, American Crossroads and the Chamber of Commerce.

To Americanize Mrs. Thatcher: Indeed, one of the reasons for our electoral failure is that people believe too many Republicans have become socialists already.

Exactly.

Again, as pointed out before in this space, Mr. Rove is a symbol of this problem. When the Ted Cruz-Mike Lee-led effort to defund Obamacare was gaining steam, the GOP Establishment was out there saying that the way to do this was not to defund Obamacare but to win elections that gave the GOP control of the White House and Congress.

Left unsaid was the fact that once upon a time, when Mr. Rove himself was the White House Deputy Chief of Staff in the Bush 43 era, the GOP did in fact have control of the House and Senate both.

Was, to pick one example, the Department of Education abolished? No. In fact, Mr. Rove boasts in his memoirs of expanding the Department with the passage of No Child Left Behind, legislation that was passed by partnering with then-Senator Ted Kennedy, the “Liberal Lion” of the Senate. And oh yes, a GOP Congressman named…John Boehner.

In other words, given 100% control of the federal government, something Reagan never had, the GOP went out of its way not to limit the growth of the federal government — but to expand it. As it were, the GOP Establishment joined hands with the other side.

This is exactly the problem Margaret Thatcher spent a career fighting. Not to mention Ronald Reagan. As Mrs. Thatcher’s ally, the late Sir Keith Joseph called it, this was the “socialist ratchet” effect. Assuming office on a so-called “conservative” platform, British Conservatives and American Republicans immediately settled in to assimilate the last spurt of government growth from the preceding Labour or Democrat administration — and then expand it.

Which brings us back to these stories in the Wall Street Journal and at Breitbart.

What these stories are exactly describing is a massive war on the conservative base of the GOP in 2014 by the people Ronald Reagan labeled the “fraternal order” or “pastel” Republicans.

And what happens if they succeed? Assuming they don’t ignite a furious backlash that costs the GOP the election?

The Republican Party can control every last seat in Congress after 2014 and the White House in 2016 — and it will not make a lick of difference. Because just as occurred when Rove was a man with clout in the White House and John Boehner was on an earlier ladder of the GOP House leadership passing No Child Left Behind with Teddy Kennedy — the Washington GOP Establishment will do everything they can to fight efforts to limit the size and growth of the federal government.

Why is this?

The answer is as simple as it is blunt. Follow the money.

The major industry — the trough, if you will — in Washington, D.C. is the big, bloated federal government.

And groups like the US Chamber of Commerce wallow in this trough. A few days before Christmas Mark Levin spent some time focusing on this issue, correctly pointing out that the Chamber, the epitome of the GOP Establishment, was “not about capitalism, they’re about cronyism.”

Over at OpenSecrets.org, one learns that the Chamber has been busy funneling its nominally conservative cash to…yes…Democrats. Specifically the Democratic Governors Association and the Democratic State Attorneys General Association. And here in the Los Angeles Times — back in 2010 — was this story headlined:

Republican-leaning U.S. Chamber of Commerce buys ads supporting Democrats

The story went on to say:

The U.S. Chamber of Commerce, which has been a powerful ally for Republican candidates in this year’s midterm campaigns, quietly moved across the aisle this week and bought ads touting nearly a dozen Democratic House members.

Mind you, 2010 was the year of the Tea Party rebellion that gave the House GOP its majority and produced Speaker Boehner. And the Chamber of Commerce was out there giving some $1,899,772 for those “nearly a dozen Democratic House members” — all of whom had cast their votes to make Nancy Pelosi Speaker of the House.

This kind of thing is exactly why Mark Levin said the Chamber is “not about capitalism, they’re about cronyism” and continued:

We need to shake up that place like it’s never been shaken before. And the problem with groups like the United States Chamber of Commerce is they’re not conservative, they’re about business. They’re not about capitalism, they’re about cronyism. The reason there is a United States Chamber of Commerce is so they can get Congress to cut deals for them, or the White House to cut deals for them, or the bureaucracy to cut deals for them. That’s what they’re there for.

Mark went on to say of the Chamber:

They’re part of the problem. The idea that big companies are necessarily conservative is absurd. Who do you think funds the left? Who do you think funds the Democrat Party? Or, all their little organizations? Big businesses do. Corporatists do. They’re trying to buy favors. That’s what they do…

Mark is correct.

But it would be considerably wrong to leave the impression this is simply about the Chamber of Commerce and American Crossroads.

The fact of the matter is that Washington is laced with Republican lobbyists who are paid big bucks to lobby the federal government for client A or B. They may even give lip service to the idea of “limited government.” But to seriously limit the government would be to cut off a very handsome way of living for these GOP lobbyists. Which is why when serious conservative Republicans — today’s Tea Party members for example — actually make it to Congress, the GOP Establishment gets the cold sweats.

Which brings us back full circle to the real problem, as seen in this story in the New York Times from the period of the 2013 government shutdown headlined:

Business Groups See Loss of Sway Over House G.O.P.

Reports the Times:

WASHINGTON — As the government shutdown grinds toward a potential debt default, some of the country’s most influential business executives have come to a conclusion all but unthinkable a few years ago: Their voices are carrying little weight with the House majority that their millions of dollars in campaign contributions helped build and sustain.

This kind of reality terrifies the GOP Establishment. Listen to this quote from — shocker — the top lobbyist for the Chamber of Commerce, Bruce Josten. The Times quotes him this way, bold print for emphasis supplied here:

“What we want is a conservative business person, but someone who in many respects will be more realistic, in our opinion,” said Bruce Josten, the top lobbyist at the U.S. Chamber of Commerce, the single biggest lobbying organization in Washington.

….“The name calling, blame gaming — using slurs like jihadist, terrorist, cowards, that kind of language — it does not get you to a deal,” Mr. Josten said of the advice he is giving to Democrats and Republicans.”

Catch the phrases? The words “more realistic” and “deal”? This isn’t simply Inside-the-Beltway language — this is the coded language of what Reagan once disparaged as the “fraternal order” Republicans. It is exactly what Margaret Thatcher was referring to when she said “too many Conservatives have become socialists already.”

Mr. Josten, Mr. Rove, the groups they are connected to are speaking the language of Republican socialists.

What Mr. Josten is saying in his own fashion is that he has accepted the “socialist ratchet” method of governing. He wants — and the Chamber he represents wants — no part of reversing this Leftist governing assumption. Josten’s job, the Chamber’s role, is simply to be in Washington and make “deals,” to be “realistic.”

The $17 trillion debt? The $90 trillion in unfunded liabilities? Hey, no big deal. Let’s manicure the next budget deal a tad and move on.

And ever further into the hole.

This was exactly the method of government Ronald Reagan — perhaps one of the first modern Tea Party activists before there was a modern Tea Party — saw as the problem. And that problem is now getting worse by the day, setting up Americans for a massive economic free-fall.

Let’s cut to the chase, shall we?

These various stories that popped up in the Wall Street Journal and at Breitbart over the holidays about Karl Rove, American Crossroads, and the Chamber of Commerce are about, to Americanize Thatcher, nothing more-or-less than Republican Socialism.

They are not about changing Washington — they are Washington. They talk a great game about limited government, but as noted, when they had 100% charge of the federal government in the Bush years they set about not limiting government but expanding government.

The real reason these people will be out there trying to defeat Reaganite conservatives/Tea Partier candidates is precisely because these candidates in victory have shown themselves to be a direct threat to the Washington way of doing business. So job one for the GOP Establishment is to deliberately pick Republican socialist candidates — candidates who are perfectly happy to talk the talk but once in Washington will refuse flatly to do what they promised to do.

As the 2014 election year proceeds, we will have many opportunities to spot these Republican Socialist candidates and their backers at work out there, just as our friends at Breitbart put a spotlight on the behind-the-scenes machinations of American Crossroads in the Kentucky Senate race.

The 2014 elections should be a bumper year for the GOP.

But it will quickly turn to disaster if those who are intent on making this year a victory for Republican Socialism get their way — and in turn drive the Reagan conservative base away from the polls.

Suffice to say?

The battle is on.

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