Strong services sectorJanuary 11, 2018
Adolfo Sánchez Zinny, president of Argentina’s Chamber of Oilfield Services Companies (CEOPE), talks to TOGY about the impact of low oil prices on the domestic hydrocarbons industry, how to attract more investment, the recent productivity agreements signed in the country and the capabilities of Argentina’s oilfield services sector.
The CEOPE was founded in 1963 to represent businesses that offer upstream services in the Argentinian oil and gas industry. The chamber has 40 member companies, including major internationals such as Schlumberger, Halliburton, Weatherford and Baker Hughes, as well as domestic companies including Bolland y Cía. Drilling services companies represented include San Antonio Internacional, DLS Archer, Petreven, Estrella International Energy Services and Nabors.
• On the unconventionals learning curve: “There has been important progress in terms of cost reduction in the unconventionals segment, which is not only due to the performance of services companies, but also because of more precise approaches and investments by operators. There was a lot of discussion regarding the type of wells that needed to be drilled in the beginning of Vaca Muerta’s development. Argentina has gone through a learning curve, and I believe it has done so quite well.”
• On investment opportunities: “The oil industry is an international industry and companies allocate their resources depending on where the opportunities are. In Argentina, the opportunities should not only be in unconventionals, but also in gas and in the treatment of mature fields. Almost 80% of Argentina’s production comes from mature fields.”
Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find the full interview with Adolfo Sánchez Zinny below.
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How has the low oil price environment affected Argentina since mid-2014?
This is a crisis that persists and that has forced the industry to readjust. In Argentina, this crisis was mitigated by regulated oil and gas prices. The level of activity in Argentina suffered, but not as much as it could have without subsidies. As a result, companies were not compelled to reduce costs in the proportion and speed that the international oil price demanded.
At the same time, in Latin American countries such as Colombia, for example, when the international oil price was at USD 28 per barrel, the oil and gas industry froze. No drill was left in operation. Companies had to reduce their headcounts, make cost cuts and even selling oilfields. A gradual oil price recovery has allowed for activity levels to be on the rise. Of course, this has been very costly for the country and the workforce, which is what one would have liked to avoid. The social cost has been substantial, but today Colombia has an oil industry that is competitive, even at the current level of prices.
Argentina experienced a positive effect. This severe adjustment involving personnel cuts was not needed, but now, with a better scenario, it is harder to adjust costs – not only for labour, but also logistics and operations – to the level that is necessary to be competitive. These are issues that must be resolved for the expected investments to finally arrive.
How can the domestic industry attract more investment?
The oil industry is an international industry and companies allocate their resources depending on where the opportunities are. In Argentina, the opportunities should not only be in unconventionals, but also in gas and in the treatment of mature fields. Almost 80% of Argentina’s production comes from mature fields.
A series of measures have facilitated commercial and industrial activities. Getting out of default, having a free currency market, being able to pay royalties to headquarters – this has all benefited Argentina in general. The country has re-established its ties with the rest of the world and it is abiding by the rules. This context makes it easier for any activity involving both domestic and foreign capital.
These macro measures will compensate for the crisis. If we had the price crisis and, on top of that, all the restrictions that were in place before the change in government in December 2015, probably nobody would be looking at Argentina as a place to invest.
How have productivity agreements in the various provinces impacted activity levels?
These are the first stages of a long journey. The so-called Neuquén productivity agreement, which was the first, is fundamentally related to unconventionals, but it nevertheless establishes parameters that are valid for the industry as a whole.
The collective labour agreements, which have been in force for many years in Argentina, with only small changes, did not anticipate the unconventionals industry, where the work dynamic is different. This addendum that was made to the collective labour agreement has an equal standing because it was signed by the same involved parties: the E&P and oilfield services chambers, the unions and the provincial and national governments. This was a step in the right direction to initiate a transformation towards a more competitive industry. It still needs to evolve with a broader, more open-minded perspective.
If one does not believe that an improvement in productivity also benefits the workers, one is looking at things in a partial, and probably wrong, way. The tests employed to evaluate quality and productivity of the industry are the same worldwide. For example, the time and people needed for a fracking operation should be universal.
There are other factors that need to be taken into account, such as equipment and infrastructure. Of course, the lack of appropriate routes, electricity and pipeline connections are obstacles that impact productivity. Ultimately, the government, unions and companies should try to look at what each can contribute to solve these restrictions.
The Neuquén agreement was improved by the one in Chubut, which was not only for the unconventionals segment. The Neuquén agreement was done a bit hastily, but the Chubut agreement took four months of weekly discussions in which every party analysed and proposed what they could contribute. The Ministry of Energy and Mining was deeply involved, with the direct participation of Minister Juan José Aranguren.
What issues were addressed by the agreements?
There was a definition of work regimes in accordance with the necessities of conventional oilfields. The so-called “taxi hours,” a system in which workers were paid from the time they left home until they returned, were eliminated and what was basically accomplished were changes in the working schemes. The government also offered productive reconversion, or salary subsidies, as a way to mitigate suspensions and dismissals.
In my opinion, a very good job was done. It was the first time something like this was done, with the participation of all the parties involved. I believe it was a very good exercise in searching for forward-looking agreements to benefit all parties, instead of retrospective and old-fashioned ones.
These types of agreements are also being negotiated in the other basins. We are still missing one for Santa Cruz. There is a lot of politics involved in that province. People wrongly associate the word “productivity” with dismissals, but this is due to misunderstanding about what productivity really means. There are things that have to do with efficiency, including issues such as ensuring that absenteeism levels are reasonable. We don’t expect absenteeism levels in inhospitable areas to be the same as in a city, but they cannot be close to five times greater.
Wind speed regulations were improved by looking at international regulations. It is true that there is more wind in Argentina than in other places and safety has to be taken care of, but it must be reasonable.
What other elements affecting industry productivity should be modified?
In Argentina there are inefficiencies resulting from a combination of factors. For instance, the whole logistics system in general is very expensive. Transport, import and export costs in Argentina are all values that are strongly out of line with international values. Changing these requires a joint effort from companies, unions and national and provincial governments, and sometimes even municipal authorities. All the industry stakeholders need to contribute to really have a leap forward in efficiency.
How are new drilling technologies being dealt with, in terms of issues related to labour productivity and efficiency?
The industry is constantly upgrading technologies. This is being looked at one case at a time. In some cases, new technologies require new skills and, in others, to reduce headcounts. In those situations, it is necessary to negotiate with the unions.
Of course, the industry needs to increase the productivity level and, in the medium to long term, this optimisation will demand more personnel, but this will not happen immediately.
How has Argentina’s oilfield service sector reacted to the reduction of import tariffs for used oil and gas equipment?
I think this is a temporary situation. The import of used equipment has come up now because there is drilling equipment throughout the world that is not currently in use because of the oil crisis. I think it is positive that Argentina is trying to take advantage of this situation to help reduce industry costs. No company will bring in equipment that is obsolete. This is relatively up-to-date equipment.
I think it could be a very good tool that, if properly implemented, would bring greater efficacy and provide the industry with new technology and a larger machinery stock.
What is the attitude of the unions in this new scenario?
I believe that the unions’ attitude is changing. The previously existing diagnosis was that the industry was healthy and profitable, that companies were making money and unions wanted to receive part of those earnings, which is an absolutely legitimate aspiration.
The problem is that all the costs and benefits have to be paid from the barrel of oil and the issue is how much goes to each stakeholder. There are many stakeholders: provincial and national governments, with their taxes and royalties; oil companies with their investments; services companies and unions, which would like to participate in that profit. The Argentine labour regime is one in which there is no co-participation in the earnings, because there is no co-participation in the losses.
In that same system, what has changed is that the industry is in another situation. There is a huge activity crisis and, therefore, unions must understand this and help the workers they represent understand this as well. The union leadership probably understands this, but is having a hard time transmitting this message to their bases of support, which are now denied those things they were once accustomed to obtaining.
What structural changes have unions undergone?
Union leaders last many years in power. Everything has to be constantly discussed within a broader structure. There is a need to make the views of people who are closer to the field and the delegates more compatible with those in the union bureaucracy, who are in some cases more involved in politics than in the operational work.
Then you have the need to change towards a greater efficiency that requires a higher level of demand. If one had to apply those greater demands without a filter, one would probably find a workforce very accustomed to a level of permissiveness that is incompatible with current needs. One encounters this situation and the leadership of both companies and unions is not always sufficiently prepared to implement a transition mechanism compatible with the goal that has been set. To convince people that by following this path we all will be better in the future is always difficult to do.
I acknowledge that the situation of conflict with the unions is not very likely to change in the near future. There is a need to activate mechanisms to have an open and effective dialogue, to sit at a table and try to find the best possible solution within what each can do, and if no agreement can be reached, each will have to follow whatever is stated in the law. What the law does and does not allow is relevant and we all must abide by it. The role of the federal government is key in this issue.
How have the capabilities of the oilfield services sector evolved in the context of low oil prices and a greater focus on unconventional development?
Argentina is privileged because the most important oilfield services companies in the world are established here. This is usually overlooked. International oilfield services companies have the capability to adapt to any setting in different oil-producing countries. It is normal for them to compare what is happening in each country in which they are working.
There has been important progress in terms of cost reduction in the unconventionals segment, which is not only due to the performance of services companies, but also because of more precise approaches and investments by operators. There was a lot of discussion regarding the type of wells that needed to be drilled in the beginning of Vaca Muerta’s development. Argentina has gone through a learning curve, and I believe it has done so quite well.
The interest that big international companies are expressing, both those that are not yet operating here and those that are, shows that there is an eagerness and a belief that the unconventionals business will have the development we are hoping. I am very optimistic because there is a very precise focus and a path to be followed that I think will find all the industry stakeholders working in a more articulated manner.
What is the level of diversification in the domestic oilfield services sector?
In my view, there is room for a greater number of oilfield services companies, basically to compete in niche segments of the market. Several smaller services companies are going broke, which is a consequence of the difficulties they face in trying to adapt to the crisis.
In terms of specialisation, there’s always room for more companies because new technologies are constantly being discovered. People often think that there is no evolution in the oil and gas industry and that is not true; there is constant evolution.
I think that in the past, operators viewed services companies as being lower-category players. In fact, we employ 70% of the industry’s personnel. The technology and efficiency of the operation is highly dependent on the quality of the service. It is not just a matter of size, but about an adequate benchmark between companies that are not always so similar.
What role do institutions such as the CEOPE play in the success of Argentina’s oil and gas industry?
Argentina cannot depend only on a particular government or on some inspired person; it has to depend on well-established institutions. Institutions such as Congress, the judicial branch, the industrial chamber and labour unions are key. I think that the sustainability of change in Argentina needs to be linked with the institutions’ support, and those institutions must also earn their place by making corresponding contributions.
Perhaps this is the most important path we need to travel from every perspective. This path will pose several challenges and I believe that the CEOPE has evolved in that sense, developing a structure that allows it to add value and to face these challenges. It requires a strong will, a lot of effort and a shared vision about how to prepare oilfield services companies to be more competitive. Argentina has paid a high price due to the lack of such institutions.
For more information on the CEOPE in Argentina, including its member companies’ activities, see our business intelligence platform, TOGYiN.
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