Thursday, April 9, 2015

Oilfield Companies: Don't Forget to Negotiate


The time to negotiate for lower prices is now. Companies are laying off, liquidating assets, and dipping into their cash reserves. The renewed task of sending RFPs or RFQ’s will require suppliers and vendors to respond favorably or lose business to those that do.

I am reminded of a true story, a similar situation, where supply was high, demand was low, and prices dropped sending companies reeling.  At this time I was tasked to drill 10 wells with a CAPEX budget approval of $15M.

I sat with the foreman and controller about what was previously negotiated and was told due to the market, I might be able to negotiate lower prices. I called companies on the project list and asked for discounts which I got; across the board around five and seven percent (5-7%). The heaviest cost came from the drilling companies, about $1M per well. At the time, I did not send award letters. Instead, I picked up the phone and spoke to the respective sales reps. I told them due to the market my budget was strained due and needed to ask for price adjustments. The major drilling company thought that they had the deal in the bag as their pricing was about 5% lower than anyone else. One independent surprisingly responded with a huge price cut saying he needed to keep his rigs up and to let them sit idle cost him more money than the discount he gave me. I called the major driller to tell him that I decided to go with the independent. Within an hour, I got a revised quote that was considerably cheaper than the independent.

As a result of this round of negotiations, the total CAPEX cost dropped from $15M to $6.5. Amazing. I couldn’t believe it myself. Had it not been for the depressed market and my picking up the phone, the cost reduction would not have happened.

This is the exception and not the rule. 0But right now we live in a time of an exception, so use it wisely.

(Another note, to help relieve the financial burden, ask the work force ideas on how to cut cost and bring additional business to the company. The magic of Kaizens work (not mysteriously but) by design. Laying off employees is a quick fix; however, when work does come back, the cost of rehire and training adds strain to an already strained budget.)


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