BP cost cuts threaten Alaska's oil field contractors

These cuts are looming in Alaska because the London-based oil company is slashing billions of dollars worth of expenses around the globe.

BP runs Prudhoe Bay's vast oil field and most of the other North Slope fields. It spends more than $2 billion annually on its Alaska operations, which employ roughly 2,000 people. BP also hires hundreds of contractors that together employ thousands of workers in the state.

BP's budget cuts aren't as drastic as some in the past -- it laid off hundreds of Alaska workers in the 1990s, for example -- but the firm's Alaska-based suppliers are worried about shrinking revenue and losing out to bigger firms based outside the state, according to Paul Laird, executive director of the Alaska Support Industry Alliance, a trade group for Alaska oil and mining contractors.

If BP hires fewer Alaska-based contractors, it inevitably means fewer oil dollars circulating in the state's economy, Laird said.

BP points to its long history of hiring Alaska firms and says it will keep hiring them in the future. Last year, it spent more than $1 billion with Alaska firms. But it says it needs to cut costs to keep its North Slope oil projects viable.

"We're a global business and have to remain competitive," said BP's Alaska spokesman Steve Rinehart.

WARNING LETTERS

This year, the company has sent out at least two letters to Alaska firms requesting price reductions and contract renegotiations.

In August, the company wrote to dozens of Alaska contractors explaining that BP planned to terminate some contracts and work with a smaller set of firms. But before making any cuts, BP invited the companies to rebid their contracts in a way that would more "effectively focus (BP's) spending," among other goals.

The companies that received the August letter occupy a niche in oil-field contracting: technical and professional staffing. There are about 40 such companies in Alaska that supply BP and other energy firms with engineers, project managers and other professionals who join BP projects on a temporary basis. The number fluctuates year to year, but the firms collectively employ about 420 workers, according to BP.

Some of the staffing firms asked to rebid their work were in the middle of multiyear projects, Laird said.

Last March, BP wrote to a larger set of companies -- roughly 150 Alaska suppliers -- requesting from them an "immediate price reduction." These companies keep BP outfitted with items ranging from paper to steel pipe.

In the letter, BP said it could no longer pay rates "aligned with the hyper-inflation of recent years," given that the price of oil had dropped to 2004 levels. The price on Wednesday was $68.45 a barrel for Alaska oil on West Coast open markets.

The company said safe and reliable operations remained its top priority. The second priority was to make sure its business model was sustainable.

"We cannot complete all of our planned activities without reducing our costs," according to the letter, written by John Minge, president of BP Exploration (Alaska) Inc.

None of the suppliers or staffing firms contacted about the BP letters were willing to comment for this story.

JUST ONE PUZZLE PIECE

The two letters are just a puzzle piece in BP's global campaign to cut costs by $3 billion this year: a reaction to oil prices falling from record levels of more than $140 per barrel a year ago to roughly $70 per barrel this summer.

In July, the company announced that it had cut $2 billion in costs in the first half of the year and planned another $1 billion in cuts by the end of the year.

In the past year, the company hasn't laid off many of its Alaska employees -- it has cut about 5,000 jobs worldwide -- but it capped Alaska employment at its current level and started an in-house campaign to press its workers to be more efficient, said Rinehart, the BP Alaska spokesman. Meanwhile, the oil giant is still pushing ahead with spending $1.5 billion to develop its Liberty oil field in the Beaufort Sea.

BP isn't the only Alaska oil producer tightening its belt this year. Conoco Phillips, which runs the Kuparuk and Alpine oil fields on the Slope, laid off about 80 employees, reduced its scope of work for the year and shrank its contract labor force by an unknown amount.

MIGRATING WORKERS

Despite roller-coaster oil prices and BP and Conoco's budget trimming, oil industry employment in Alaska has not declined much. In fact, it's almost as high as it's ever been.

Thanks to the high oil prices of recent years, oil industry employment reached its highest ever level a year ago at about 13,300 workers, according to the Alaska Department of Labor.

Despite the ensuing price slide, industry employment has remained at about 13,200.

Marilyn Crockett, who heads the Alaska Oil and Gas Association, a trade group for the oil producers, says it's probable that oil-field employment would have declined this year if not for three new North Slope fields under development: Eni's Nikaitchuq project, Pioneer Natural Resource Co.'s Oooguruk project and Exxon Mobil's Point Thomson project.

In all likelihood, if BP axes some of its contracts with staffing companies, those temporary workers will migrate to other firms hired by BP.

Some Alaska contract workers, speaking anonymously, said they recently have begun receiving recruiting phone calls or e-mails from out-of-state firms affiliated with BP.

At least several out-of state companies already provide staffing for BP in Alaska. One of them, Houston-based Swift Oil and Gas, opened an office in Anchorage in July, and is advertising job openings in many specialties, including supply-chain management, engineering and construction. Another Houston-based staffing firm that is working for BP in Alaska is Moody's International USA.

Alaska contractors and suppliers are "and have always been" concerned about losing work to larger, out-of-state firms, Laird said.

He said the Alaska companies are striving hard to compete on a cost basis, but they also can offer additional value to BP and other oil producers because of their local experience and community involvement.

He sees Alaska oil-field contractors at greater risk now from out-of-state competitors for several reasons:

• The recent decline in oil prices.

• Additional cost pressures created by declining production and aging oil fields on the North Slope.

• The state's recent revised tax rates, which Laird says have squeezed the producers' margins "regardless of the oil price."

---

Find Elizabeth Bluemink online at adn.com/contact/ebluemink or call 257-4317.