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Over a barrel.


Falling oil prices pushed oil field work into a precipitous decline that tested the mettle of Alaska's oil field service firms. Here's the survivors' saga.

FROM BARRELS TO BUCKETS. Work in Alaska's oil fields dried up during 1986 and 1987 as oil companies, reacting to plummeting oil prices, scaled back exploration and production activities. The oasis became a desert, parching the operations of oil field support service firms. All could not survive, and most businesses dependent on oil patch revenues downsized, merged, fled the state or withered and died.

Compounding the slowdown in activity was the failure by many businesses to heed warnings that the halcyon days of the early '80s would not persist. Economists had been forecasting fewer jobs and less spending in Alaska's oil industry as the North Slope's major producing fields began reaching maturity in the mid-'80s. With nosediving oil prices, the fields of opportunity yielded fewer harvests and, in many cases, largely lay fallow.

Firms that had invested in equipment and facilities to take advantage of boom-time business found themselves unable to cover upkeep and debt expenses. They also were unable to downsize nimbly. Not surprisingly, what little work remained attracted so much competition that profit margins dropped despairingly low, sometimes so low that errors or unforeseen costs dragged the victorious bidder under.

There were many ways a business could fail; fewer to survive. Those that did eke out an existence succeeded through combinations of careful cost management, restructuring, innovation, tapping new markets and expanding and diversifying services. Although times still are tough, particularly for construction firms, many managers admit to cautious optimism. There's a sense that stability is returning to the oil industry. As many as a dozen wells may be drilled in the Arctic in 1989.

Another emotion evident is pride. In taking stock of their achievements, the survivors are recognizing that they've emerged from the drought in better shape, that their businesses are leaner and fitter competitors. The proving grounds offer viable opportunities to earn a living, if not the abundant spoils that characterized the oil fields in earlier years of the decade.

Scott Jones, president of a Philadelphia-based consulting firm specializing in the energy industry, says, "After Alaskan oil field service firms were knocked on the mat in '86 and '87, they were back on their knees in 1988." He notes one early sign of recovery is that support industries haven't withered a great deal further.

Although warning that any future activity will be oil price-sensitive, Jones predicts support industries should see "significant and meaningful improvement during the next two or three years-10-20 percent increases in revenues." The improvement will be driven, he explains, by the need to drill more wells to maintain levels of production from Prudhoe Bay's reservoirs.

Because older oil fields require more investment and maintenance-more work to keep wells producing as reserves decline-drilling companies and other "downhole" operators can look forward to work opportunities. Bill Webb, director of membership services for the Alaska Support Industry Alliance, says that's a plus for many of the organization's members.

After dropping from 350 members in 1985 to 80 by the start of '88, enrollment in the Alliance climbed to more than 200 by the end of the year. "There was a big shakeout, but now we're seeing some stability return to the industry. It's no longer a boom, but the survivors are doing relatively well," says Webb. Changes in Latitude. Restructuring was the key, and the industry has changed in terms of wages, profits and costs. Adds Webb, "Companies can't do the things they could do in 1985. They had to change, and those changes are permanent. The good old days aren't going to come back."

For one, businesses can't enter the market with the freedom of previous years. Although Alaska formerly was known as an easy location in which to start a business, new suppliers of goods and services now are handicapped by the results of restructurings in the oil patch. Not only have the survivors become stronger opponents but rules of the game have changed, too.

Today oil field support service firms need to prove both expertise and a level of financial security. Peter Leathard, president of Veco Inc., the largest oil field service firm in the state, says the oil companies deserve credit for helping to stabilize the market. They have supported contractors with facilities in Alaska, those that obviously are here for the long haul. They also encouraged acquisitions and joint ventures to strengthen industry players, he adds.

According to Leathard, when bidding was open from anywhere, companies often competed for Alaska work with no presence in the state, literally bidding off the plane. The danger is that when contractors are hanging on by their fingernails, taking work at any price to stay alive, the stronger firms may be stretched too far to recover by the time the weaker competitors disappear. The ripple effect could have left a real void in oil field services.

But in 1987, the oil firms changed policy. Leathard says they announced they wanted to do business with companies that had facilities and other assets in Alaska, indicating a commitment to remain in the 49th state.

Chuck Kenley, manager of the Contract Section for Standard Alaska Production Co., says his company recognized the need to use a limited number of firms. He explains that a policy decision revised contractor criteria to include performance on past work, contributions to North Slope development and prospects for remaining a viable company.

Brian Tomlinson, engineering manager for Fluor Daniel of Anchorage, says since the mid '80s there's been a definite trend to do more design work in Alaska "to the benefit of Alaskans and the benefit of the economy here." He points out that not just ARCO Alaska and Standard, but also Marathon, Mapco and other oil field support service employers have made commitments to using local firms.

"In the end, that emphasis will pay more dividends, not from the political standpoint of being a good citizen, but because when large projects evolve again the expertise will be here," says Tomlinson. He notes many of the talented managers from the pipeline project have retired and new leaders need to be cultivated to fill key positions when future energy projects are launched. Those projects may occur sometime down the road in Alaska or in other areas where arctic technology proven in the 49th state will be needed.

Since opening its Alaska regional office in September 1984, Fluor's staff has grown from 3 to 145. The architectural, engineering and construction company had maintained an Alaska office from 1974-82 to oversee various projects. Tomlinson says business today differs from that conducted in the late '70s and early '80s, primarily because of cost cutting. The competitive market requires running a lean and mean operation, he explains. New Avenues. The departure of many Lower 48 service companies and the downsizing of local firms made it easy for Fluor to recruit experienced personnel. To survive the shortage of oil field work, the firm has diversified, providing services to electric utilities and the U.S. Army Corps of Engineers in Alaska.

Universal Services, an oil field catering and housekeeping firm founded in Alaska and headquartered in Seattle, sought other opportunities in mining and logging camp support and is looking at servicing the expanding trawler and fish processing markets. Says Roger Hemphill, ALaska division manager, "Our company has changed. We used to support nothing more than the oil industry, because the work availability was so big."

The company was acquired in October 1987 from Universal Services International, which declared bankruptcy that fall, and now is operated as a division of International Catering Enterprises. According to Kirby McDonald, chairman and chief executive officer of Universal Services, business in Alaska has grown more than 20 percent since the acquisition. New contracts have been landed at North Slope camps, as well as in other industries.

"Oil companies are more creative in the way they view projects than before and willing to look at opportunities that can benefit everybody," says McDonald. In the catering business, the contractor's commitment has included more efficient use of food products, better dietary education and improved logistical support.

McDonald, who also is involved as a partner in the Alaska-based firm Peak Oilfield Service Co., notes changes in the oil industry mean it's no longer feasible for a service company to specialize in a particular activity. Contract opportunities have decreased dramatically in recent years without a corresponding reduction in the fixed costs of operating and insuring a business.

Prior to December 1987, Peak operated as Peak Maintenance Co., a partnership of the regional Native corporation Cook Inlet Region Inc. and McDonald Industries, a heavy equipment distributor. The name change reflected the acquisition of equipment from Kodiak Oilfield Haulers, whose owners, the New York-based firm Anglo Energy, share in the ownership of the new entity.

As with other acquisitions of this type, Peak's expansion was designed to enhance the services it provides, enlarging its equipment base to compete not only for maintenance contracts, but also for heavy hauling, civil construction and maintenance, tank truck services and modification of production facilities. As a larger, more diversified firm, Peak hopes to avoid the fate of others that have lost the battle for survival and disappeared from the oil field services arena. Overhead Overhauls. According to Ross Thompson, administrative manager for Peak, the enlarged company can operate more efficiently. It has increased its assets but not its overhead and management costs. Even so, competition is hot. Says Thompson, "We're fighting and scratching for everything we can get."

Operating the largest fleet of owned equipment is Veco, which since 1985 has grown through the acquisitions of Mukluk Oilfield Service Co., a firm providing cranes and heavy-hauling equipment, and Northern Oilfield Services, an oil field trucking firm. Says Leathard, "A lot of companies have acquired others or joint ventured together to provide full-service capabilities."

He explains that given the choice of whether to retrench or get aggressive, Veco chose to increase its revenues through acquisitions to expand the company's capabilities. Leathard points out the route is risky due to debt incurred, but notes the company has reduced overhead of its pieces and is well situated to take advantage of a rebound in business.

Expansion into trucking and heavy-hauling operations also were part of corporate strategy to be well positioned for a resurgence in work. Explains Leathard, "The first to revive as activity picks up in the oil fields will be drilling, and we'll be on the leading edge."

The expiration of project labor agreements with unions helped to pave the way for Veco's expansion into major construction. For the present, construction remains a "disaster, an area companies are subsidizing to stay in business," says Leathard. "The margins are so low, I don't think anybody operating in Alaska makes profits. Everything goes toward overhead. But if a company is a solid player in the marketplace, it can't walk away."

In former times, he recalls, firms wouldn't touch North Slope work unless there was the opportunity of making 30 percent to offset risk factors, particularly weather. "Now firms are lucky to make one-third of that," he says. "Businesses are taking work and gambling. In the Arctic, if you do work and ignore the risks, you can get caught."

Rick Schok, owner of Flowline Alaska in Fairbanks, says his pipe insulating firm gets its share of the business, but is having a hard time making money when the bidding is so low. "What earned us a dollar In 1985 brought us only a dime by 1987," he explains.

Many firms have had the impact of declining oil field work cushioned to a small degree by healthy levels of activity in the mining industry, which requires similar services and equipment. Increasing investment in port and harbor facilities, due largely to mining and logging projects, has been providential for Underwater Construction of Anchorage, a company that specializes in construction-, maintenance- and inspection-related diving.

Says Russell Sell, manager of the company's Technical Services Division, "Developments in the marine industry have helped to carry us over the rough spots in the exploration phases of oil fields in the state." He adds that '88 probably will be a record year, due largely to unscheduled maintenance on Cook Inlet platforms, work on new modules and several vessel salvage operations. The firm hopes to be involved in drilling in the Chukchi Sea next summer. Oil Field Entrenched. Bob Gardner, manager of Alaska Operations for ENSR Consulting & Engineering, says his firm made a conscious decision to stick with the oil patch as its primary market. Although its service base has expanded and is only 85 percent oil field-related, as opposed to 95 percent in years past, the 15 percent of gross derived from serving the mining industry employs the same skills.

"A negative of diversifying is you have to get up to speed," explains Gardner. He says the combined cost and time required to get a new industry familiar with and confident in the firm's services would not be well invested for his firm.

Instead ENSR has been content to expand services it can offer within the oil field sector, such as becoming increasingly involved in waste management consulting. The firm, formerly Nortec, was founded in 1977 and acquired in April 1987 by ERT, a national environmental consulting firm owned by Resource Engineering Inc. of Texas. The integrated companies became ENSR Corp. in 1988.

Gardner notes the company now enjoys the advantage of being a well-known Alaskan firm and having greater financial and operating depth. Among the new resources the firm has gained is the ability to tap into a more sophisticated computer network. For example, it can use computer modeling capabilities of a Colorado system for air quality analysis.

ENSR has fared well and reports it will earn a profit in 1988. At worst, revenues were off 35 percent in '86. Gardner says the company is not doing as well as before, but it's close. "That's due to the fact we didn't scale up," explains Gardner, who believes the company's attentiveness to overhead is an important element of its survival and health.

"A company can't downsize fast enough in a boom and bust economy," he says. "It can't expand fast enough on the upside; it's always outdistanced. And when activity falls off, it can't downsize fast enough. We've held the middle ground. By limiting and controlling growth, we may have missed some big jobs during the boom, but we saved money on the crash."

As the drought subsides and more activity stirs in Alaska's oil patch, the competitors are different companies. Survival required reassessments of commitment. It meant adjustments in profits, work force and attitude.

Says Veco's Leathard, "The last couple of years brought the whole industry-oil firms and support companies-back to reality. Oil prices were so high, work so plentiful, that we didn't have to manage businesses like we do today. Now it's not just a matter of getting a job done. It's a matter of managing business."

Adds ENSR's Gardner, "It's a good challenge, one I don't mind so much. Anyone can make money when they can charge whatever they want. The challenge is to keep the office in the black in competitive times. I'm proud of what we've done in the past year."

PHOTO : Fluor Daniel's Brian Tomlinson: "Technical advances, particularly microcomputers and

PHOTO : computer-aided design tools, play an important role in holding projects within budget and

PHOTO : schedule restraints."
COPYRIGHT 1989 Alaska Business Publishing Company, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Alaska's oil field service firms
Author:Griffin, Judith Fuerst
Publication:Alaska Business Monthly
Date:Feb 1, 1989
Previous Article:Promoting Hollywood north.
Next Article:Flowline Alaska of Fairbanks.

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