Why The Drilling Industry Needs To Plan For Failure

A contract ain’t what it used to be.

In the late 1990’s and the beginning of this century, oil prices began a steady climb that would see them reach historic levels. In 2008, the cost of a barrel of oil was as high as it had been since 1979.

So as the oil flowed more freely (while, not free, but you get the idea), every energy-producing corner of the planet committed to new projects, new contracts, and new anticipation of a lucrative market for years to come.

Unfortunately, the industry didn’t plan for all of that to disappear.

“Yet despite their vast importance, few experts seem able to reliably predict where oil prices will go next. Financial markets and policymakers are perpetually surprised by large swings.”

That’s Brad Plumer, senior editor at vox.com. For Brad, large swings in oil prices like those we experienced in the mid-2000’s is just one example of shattered expectations. Conditions that lead to a surprise in oil prices include:

  • the difficulty predicting demand
  • unexpected technological advances
  • politics

For instance, with the growing popularity of electric motors in vehicles such as the Tesla, does this represent a boon or a bane for the oil industry?

Many would argue it does, however many others would argue the distinction between what types of energy we use isn’t a priority, only that we have energy to use at all.

With so many intangibles influencing the economy and the state of the industry, it’s little wonder that corporations large and small have a difficult time planning for a decrease in the budgets of their customers.

That’s why we have to plan for the worst while hoping for the best.

How Can You Lose Money?

During the design process we work through together with our customers, we always make sure to expose any potential situations that would result in lost funds. These examples range from common best practices to the all-but unforeseen circumstances that are difficult to plan for, which is precisely why we have to try.

  • unqualified operators
  • imbalance between purchase price and sales price
  • supply outpacing demand (for machines, equipment, and parts)
  • being outperformed by the competition

Losing to the Competition

Naturally, we’re focused on our own work and our own products, and we create solutions to the best of our abilities. It’s human nature to believe in yourself when you invest your life in your career, and that’s why it’s often unthinkable that our competition might actually be competent.

However, it’s right there in the word. If your competition wasn’t competent, then they wouldn’t be your competition, right?

Right. Well, the market is forcing the strong, progressive companies to improve and it’s offering the new up and comer’s a chance to prove themselves in a, wait for it: competitive market. 

Lost Time

In addition to losing money to a range of factors like competition, the best way to pre-emptively strike against failure is to pinpoint as many potential instances of lost time as you can. This is why, before building a new attachment or fabricating a custom head or other tooling product, we spend as much time as it takes to get it done right. In the past, when a customer’s budget wasn’t nearly as tight as it is today, companies were working with new products as fast as they could be produced, because losing time later wasn’t as detrimental.

Well, those days are over. Certainly in the here and now and hopefully into the future as well if the economy straightens out, our industry can maintain processes that place value on time, energy, and of course, our investments.

The closer we scrutinize potential failures now, the less likely they’ll be to cause problems in the future.

And a future with fewer problems is one we can all get behind.

3 Time-Saving Questions to Ask Customers Before The Work Begins

For the past few weeks we’ve been talking about the realities of oil prices and the important actions you can take to alleviate some of the pressure your company might be feeling. From gloomy reports in Canada to optimistic predictions in North America to  tempered expectations in the UK, quarter one oil prices provided plenty of fuel for debate in the first three months of 2016.

…Which is an ironic statement, I know.

While we may be low on fuel as an industry (actually, we’ve got plenty of fuel, that’s part of the problem), on the front lines, in the shops and on the job-site, we’ve got plenty of reasons to keep working hard and providing solutions for customers whether you’re working in the drilling industry or the engineering and manufacturing sectors.

One tactic we’ve found helps us deal with tightened budgets is to focus on saving time, which will always lead to saving money. Before you make a sale or you commit to a new relationship with a customer, it’s helpful to build a detailed understanding of expectations. This might involve spending more time not working at the beginning, but you’ll avoid wasted time later on.

Here are three questions to answer before the work begins.

1. What will success look like for the project?

In order to establish clear metrics for every project, it’s important for both buyer and manufacturer to gain a clear picture of the desired end result. That way when obstacles present themselves, and they will, it will be a lot easier to find a solution in short order. The metrics by which every project is measured are completion deadlines and budget, but what about the actual performance of the project? Once the machine is up and running and doing its job, what will that job look like once it’s successfully been completed?

2. What are the 3 main responsibilities for this product?

We’ve found a lot of success designing attachments that go above and beyond the call of duty. Drillers who can put a machine to work on multiple tasks save a lot of time and effort that would normally be devoted to set-up, teardowns and transportation of equipment. For example, what type of trees will our grapple be grappling? What sizes of pipes will our Scorpion Pipe Handler be handling? Into what type of earth will our tooling products be drilling? These days it’s beneficial to use versatile equipment, but it’s important to find the proper balance between versatility and productivity.

3. Who will be using this product?

If safety rules the day, then productivity is its loyal commander. We all want to go home safe every day, but we also want to get a lot of work done while we’re on the job. Before you sell an attachment or a machine, paint a clear picture of the operator who will actually be rolling up his or sleeves on location. Will they be working in difficult conditions, like the side of a mountain? Deep in the jungle? What does their level of experience look like? These questions will also help you decide on the level of customization required.

Asking the tough questions before a project begins might seem like an extra effort for which you don’t have time, but it’s an effort that’s necessary if you want to ensure the job is done right.

And getting the job done right is valuable no matter how much a barrel of oil costs.

What To Do While You’re Waiting For Oil Prices to Rebound

“Crude oil, or “black gold,” is one of the world’s most precious commodities: its price affects the economic ecosystem at every level, from family budgets to corporate earnings to the nation’s GDP.”

That’s Prableen Bajpal, a chartered financial analyst and the founder of FinFix, a financial research and training facility in India. For Bajpal, it’s important to understand the various factors that affect the price of oil. From news cycle responses that fuel one perspective or another to policy changes in governments in every corner of the world, the fluctuation in oil prices can be traced back to a multitude of factors.

Since the summer of 2014, oil prices have been steadily shrinking, which occurred at the end of a “four-year phase of price stability” where crude oil rested at around $105 per barrel.

Well, the days of $105 barrels of oil seem like a distant past as well as, hopefully, a future as well.

But in the meantime, it’s up to you, the original equipment manufacturer, the machine dealer, the drilling engineer, to weather the storm.

How?

Reassign Your People

For thousands of out-of-work men and women accustomed to opportunities galore in the oil and gas industry, it’s a bitter pill to swallow when you’re told you’re no longer needed. For years we’ve seen skilled labour and proficient technical skills put to work on a variety of projects. The only problem with these focused skill-sets is that they have a tendency to exclude other skills.

For instance, maybe you’re an expert machine operator, but you struggle with organization. Or perhaps you’re an excellent communicator, but you’re using outdated methods that could be improved.

If it’s safe to do so, assign your people to different areas instead of ditching the work you might think can only be done by a new hire. Data entry, scheduling, inventory – some of these tasks might be foreign to people under your employ, but they’ll gladly give it a try if it means holding on to their job.

Offer More Value Than You Cost

One of the biggest keys to unlocking the economic downturn is to return to the roots by which you originally found success without worrying about income at the end of the day.

This might sound crazy, but the more we focus on the results we want to see in our corner of the industry, the less likely we’re to see those results come to fruition.

The drilling industry, forestry, construction – they’re about building solutions that enrich and improve lives. Somewhere along the line, probably when the price of a barrel of oil soared beyond $100, we forgot the simple fact that our careers exists to provide a service. The days of throwing money at hurdles placed in our path are over, and that means we need to back up our promises with good old fashioned hard work and creative, cost-friendly solutions. If you’re selling something, then you’d better make sure your buyer will receive something of great value or importance.

Because if you can create more value than you cost, then you’ll have a job for life.

Next week we’ll drill deeper into the realities of the current oil economy, specifically as they relate to what we believe is the most important tool of all when it comes to creating value out of thin air: communication.

What’s the Drilling Industry’s Magic Number When it Comes to Oil Prices?

“Mazalov said that a lot of deep-water projects need more than $90 per barrel in order to break even, which means many companies that have invested in such projects “are hurting”. That’s from a post over at Spencer Ogden, a recruitment firm specializing in the energy sector.

This is the first in a special two part series investigating quarter 1 oil prices and its impact on drilling companies of all sizes.

For Spencer Ogden, there’s no use denying the damaging effects the oversupply and under-demand of oil has had on the global drilling industry. The article above notes that gigantic companies such as Schlumberger, Halliburton, and Helmerich & Payne have made drastic cuts to funding, investments, and, most importantly, jobs.

Here in Canada, the market across the country has been hit hard by the plummeting price of a barrel of oil, which currently hovers around 40$ USD. While some analysts believe we could finally be in store for a rebound by the end of 2016, we’re guessing a lot of people don’t have an appetite to sit and wait that long.

We sure don’t. So what can we do about it?

Oil Prices & The Global Market

Why the doom and gloom? Because it’s important to be realistic. Viking West was created just over two years ago, during what we can now admit wasn’t an ideal time for a brand new equipment manufacturer to take the stage. However, the economic climate actually helped shape our company. While we could have packed it in and succumbed to a global market with zero appetite to spend money, we realized there was a niche we could satisfy.

You can’t control the ebb and flow of the global oil market. Heck, like we said above, not even corporations like Schlumberger and Halliburton can control the global market.

So what can you control?

Oil Prices & How it Affects Your Local Market

“We’ll see higher oil prices” with “supply and demand tightening in the second half of the year,” that’s Bob Dudley, the chief executive officer of BP Plc.

That’s good news for OEM’s everywhere, but the danger in waiting for the economy to correct itself is missing out on smaller business in the meantime. One advantage of operating a company with a small storefront mentality is the face to face interactions we have with local customers. That doesn’t just include our friends down the street here in Langley, BC. With our partners from Dando Drilling in the UK, we’ve met some determined people in the past year at exhibitions such as PDAC in Toronto and the Groundwater Expo in Las Vegas.

The lesson? Work hard and work together to make fair deals that benefit not only the people in your local market, but a global economy that’s bound to pay attention at some point.

What Do We Do When Oil Prices Plunge Below 50$ a Barrel?

“Douglas Westwood believes that if oil prices average between $50 and $70 per barrel in 2015, total wells drilled could, in fact, be expected to increase by 17 percent by 2020 with the number of deep-water wells increasing by 32 percent over the same period.” That’s Spencer Ogden again.

The first three months of 2016 have seen oil prices drop below $50 a barrel, but the fact is these figures are the result of actions that took place months, even years ago. The market is notoriously slow to react – it’s one of the reasons that projection in the drilling industry can be so frustrating.

Deep water drilling all but stops when prices fall this low because it “costs more money for them to drill and produce oil than they can sell it for,” says Paul Mazalov of Spencer Ogden.

So what should we do when the price of oil makes it difficult to justify your expenses?

Stop trying so hard.

Next week:

We’re going to drill deeper into the realities of operating a drilling company in the current economic climate, specifically regarding how you can weather the storm internally.