What is an oil company?
It is not just a corporate entity exploring for and producing oil and gas. All but the smallest operators are also significant practitioners of procurement and logistics.The larger outfits have small armies of people in essentially the same business as Costco and FedEx: buying lots of stuff on price and volume, moving it around and trying to keep track of it all.
Except at Costco and FedEx, this is all they do. There’s no attempt to develop hydrocarbons.
It matters because with oil stuck at $50 and natural gas at $2, more oil companies are realizing they must change their business model to remain competitive. Some admit this publicly. But the transformation from acknowledgement to change is daunting, particularly if you don’t know how.
Let me help.
In 2014, consulting and accounting company MNP undertook a research project for the Petroleum Services Association of Canada to determine total employment when drilling and completing new-generation horizontal wells. Well profiles typical to three major plays were examined—Montney/Duvernay, Viking/Cardium and Shaunavon/Bakken—to calculate direct workers required by product and service. Everything from surveying the lease to fencing a completed producer was included. While the figures are dynamic as the process evolves, fascinating information was revealed.
On average, 45 vendors were required to drill and complete the well. This assumed all rental equipment came from one company, which never happens. Make it 55 vendors. An average 40 per cent of required workers had nothing directly to do with drilling or completing the well, the core definition of “oil” in oil company. They were engaged in operational support services for the location and logistics: construction, camps, wellsites, matting, tanks, cuttings removal, lighting and water hauling, to name a few.
And trucking. Everything from cats to rigs to casing to drilling tools had to be hauled to and, except for what remained in the well, back. Continuously. This clearly illustrates why oilfield trucking is massive.
Ignoring the wellbore, to drill these wells, the operator must sort through reams of quotes from dozens, if not hundreds, of vendors, establish master service agreements, dispatch efficiently so everything arrives on time and nobody waits, haul it away expeditiously to minimize rental fees, and then sort through stacks of field tickets and invoices.
No investor buys shares in an oil company based upon its wizardry in bidding, procurement and logistics. Shareholders only care about production, reserves and return on investment capital (ROIC).
Oil service legend David Werklund figured this out years ago and, in early 2015, invested in a software solution for the trucking component. Called Payload, the idea was to use more and faster data to optimize transportation in a region. He knew significant savings were available by reducing or eliminating deadheads (trucks arriving loaded and leaving empty or arriving empty and leaving loaded). When multiple companies are operating in the same area, empty trucks regularly pass full trucks.
Non-oilpatch truckers determined deadheads wasted money decades ago. No trucker runs a load from Calgary to Vancouver without arranging a backhaul. End-users, often competitors, know they can cut transportation costs when they cooperate.
When Payload was introduced, everybody agreed it was a good idea. But success required multiple operators or vendors in a region to communicate and cooperate. When introduced at the operations level, the reaction to Payload was mixed. It’s one thing to cut costs; it’s quite another if it is my job. The challenge is there’s minimal history of cooperating with other oil companies when it comes to day-to-day operations.
One roadblock is the executive and production C-suite doesn’t pay enough attention to how their operations function. If suppliers are squealing, costs must be as low as possible. Executives assume there is only one way to run an oil company, which coincidentally, is the same way they ran it yesterday. Except they know intellectually the future must be different from the past thanks to continuous reminders from their ROIC and share price.
Payload has changed its business model somewhat and has landed a couple of major operators. One is automating the administration of all fluid hauling in the Montney region. Another is introducing advanced process management to all services in a southeastern Saskatchewan field. The take-up by vendors is encouraging once everyone from truckers to owners realizes they can run their business the same way they run their lives: on their cellphone. The clients anticipate tangible savings.
You can’t materially change the performance of a business without materially changing its behaviour. What is an oil company? Keep asking that question.