Two Realizations Coming Out of a “Break up from Hell 2.0”

By Mark Salkeld, President and CEO, Petroleum Services Association of Canada (PSAC)

When times are tough, the first things to go are safety budgets and supply-chain relationships. This is my fifth experience with a downturn in the Canadian oilpatch and I clearly remember when the infamous NEP struck Alberta. My safety point accumulation account promptly ceased — this was an incentive plan that awarded points for adherence to safety standards in exchange for coveted items like leather jackets, ball caps and coveralls. It wasn’t long after that when the shop PA system sounded out names, typically on Monday mornings, and mine was among them. It was my first and only lay off during a 36-year career in oilfield services. I remember the sense of sadness over the loss of safety points and the feeling of dejection from being laid off. As I’ve come to witness repeatedly in my career, the first sign of reigning-in spending is the elimination of safety programs.

The next sign of reigning in I experienced while climbing the corporate ladder came in the form of letters from E&P customers requesting a significant lowering of invoices. Demands of 10 to 30 per cent cuts with noncompliance clauses forefeiting the relationship became commonplace in downturns, with threats of sending the project back to tender or using suppliers that complied with these demands.

Fast forward to today and nothing seems to have changed. I will concede that there is a higher regard for safety, but it still comes under the chopping block near the onset of a slowdown. For example, in fall 2016, a service company executive doing field calls to 15 operational locations was not site-specific orientated once, and was signed-in to location twice. There was no dedicated safety person on location and whoever held that responsibility probably had 10 other duties to tend to, such as running the pumping unit and blenders. Safety is a culture for some operators; for others, it is an expense and a checked box on some redundant safety registry to satisfy the customers pretense for safety oversight.

And the supply-chain relationship? There are E&P’s out there bragging about lowering costs through a reverse-auction process. A reverse auction is an online system that automatically extends the bid after the preceding lowest bid is submitted, sharing that last lowest bid number to encourage desperate-for-revenue oilfield service and supply companies to bid lower. It is a despicable cost-savings innovation that damages relationships. Recent studies suggest Canada is 15 to 20 years behind other countries when it comes to supply-chain relationships in the oil and gas industry between producers and service companies. I have worked in oilfields around the world and I tend to agree with that estimate. At first it was difficult to adjust to the tendering process in other countries. You must reveal far more information than when tendering bids in Canada. But the ultimate result when the bid is won and a five-year contract secured, is a collaborative and supportive relationship with the customer instead of an adversarial and penny-pinching one. Everyone comes out a winner with job security, economies of scale realized through longer-term planning, and cost savings realized and shared between the customer and service provider. These supply-chain tenets promote an open and respectful relationship, further allowing for the professional and expedient resolution of issues. I have yet to witness a similar supply-chain relationship in Canada.

When it comes to oilfield service, supply and manufacturing safety, and supply-chain relationships, the Canadian oil and gas industry has plenty of room to improve. We need more professional supply-chain relationships and we need a much greater commitment to safety. There are savings to be realized through both. I believe the key to enhancing safety is to create, mandate and enforce a uniform set of safety standards that every level and aspect of the Canadian oil and gas industry must adhere to — in good times and bad. The ability for producers to rip up contracts without repercussions when their margins are threatened cannot be an accepted business practice. Canadian suppliers must become comfortable with opening their books to customers during the tendering process, knowing that the process will be respected. If contracts are won, it is a collaborative and respectful relationship through to the mutually agreed upon end to the contract.

There are solutions to these industry challenges – and Petroleum Services Association of Canada is committed to bringing them to the table in 2017 and beyond. Those that buy in will win, those that do not will lose — it is as simple as that.

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