An acquaintance at a service company reports “there is increasing push from operators to address [operators’ cost escalation] and to explain why costs from service providers are high today, and how we (service companies) are addressing the matter.”

The question was put to Steve Jacobs of RMI, who has conducted numerous market research projects for many companies in the oil field, during a lunchtime conversation.

“Part of the reason for higher E&P service prices is that the wells being drilled are in more difficult environments. These are not plain vanilla wells. When your mix of wells shifts more to ERD, multilateral, multi-whatever — it is more expensive.

“I think another factor is the considerable expense in training new people. Can you imagine what Halliburton alone is spending on training for the 13,000 people they hired last year?! Many are non-oilfield and must become pretty competent in a short period of time.

“Another factor is the equipment build rate. The technology is more sophisticated, and the cost per unit is no doubt higher to boot. A new frac truck can be in the range of US $500,000.

“Meeting increasingly more stringent HS&E policies also adds to the bill.
“Operators are also asking the service companies to assume more risk in drilling and other operations. With more risk comes higher rewards.
“Lastly, the service companies are finally making decent profits.
“One other factor I forgot is operational expense. I had one beer yesterday in Stavanger. I then ordered a burger and a diet Coke. $50!”

All are valid points. But there is another factor influencing the costs of doing business — litigation. And this problem applies to every company in the industry.

New findings on energy industry disputes are contained in an annual US Litigation Trends survey from law firm Fulbright & Jaworski LLP. Fulbright found that 83% of energy companies faced at least one new lawsuit last year, with nearly a third of energy companies (31%) facing over 20 new suits in the past year. And just under one-half (47%) of the American energy companies surveyed reported facing at least one $20 million action, second highest among a dozen industry sectors polled.

Litigation has obviously become a major line item in energy company budgets. One-fifth of the energy firms reporting in the Fulbright study said that they spent at least $5 million on litigation, excluding costs of settlements and judgments, while 46% reported spending over $1 million per year on business disputes. Other important energy industry findings include:
• Over a third (35%) of energy firms expect their case load to increase next year;
• 54% have class actions pending against them, third most of all industries;
• 57% of energy companies have been forced to institute an internal investigation requiring the assistance of outside counsel within the last year, slightly above the 54% average for all industries. 6% face six or more internal investigations;
• While 40% of energy companies report an increase in external regulatory inquiries and investigations, 38% expect the number of inquiries to increase in the future, the second most of any industry behind healthcare, significantly higher than the US average.

But there’s good news — a moderating trend, the study indicates. Based on interviews with in-house counsel at 250 major US corporations, 17% of respondents said their companies had escaped the past year without having to defend a single new lawsuit, up sharply from only 11% in 2005 through 2006.

American corporations also appear to have backed off as plaintiffs — 65% of respondents said their company had initiated at least one lawsuit in the past year, down from more than 70% a year ago and an even steeper drop from 2004, when 88% of US companies said they had initiated litigation.

That litigation may have softened in recent months is evident on another front: only 22% of in-house counsel said they expect to see the number of legal disputes their companies face increase over the next 12 months; a year ago, 33% said they were anticipating a rise in lawsuits involving their company.

Even the government seems to have lightened up a bit: 48% of companies reported some regulatory proceedings brought against them in the past 12 months, down more than 4% from a year ago. Internal investigations fell even more sharply. By contrast, UK companies have experienced significant increases in both categories.

Yet even as some types of actions appear to have dipped in the past year — notably securities and bankruptcy disputes — other kinds of litigation are on the rise, particularly patent cases and lawsuits stemming from product liability.

The sheer economic stakes of litigation remain daunting. Forty percent of US companies say they were hit with at least one suit in the past year with more than $20 million at issue. Among billion-dollar businesses, 62% were served with at least one $20 million lawsuit.
The survey is a interesting read. Full survey findings can be found at www.fulbright.com/litigationtrends.