Imperial squeezing “staggering” savings from suppliers by stoking competition

CALGARY – Imperial Oil says it has been able to achieve “staggering” savings in the oilsands by stoking competition between suppliers.

When crude prices began their steep descent late last year, Imperial held a “reverse auction” for earth-moving contracts at its Kearl oilsands mine north of Fort McMurray, Alta., CEO Rich Kruger told investors and analysts Wednesday.

Firms vying for Imperial’s business sought to outbid each other for the lowest price.

“We don’t tell folks how long the auction’s going to run for, so if you want this work, you’d better get on it, you’d better put your best foot forward,” Kruger said of the process.

The result? Imperial (TSX:IMO) was able to knock $100 million off of $160 million in contracts for a couple of years’ work.

Even Imperial was surprised. It figured drilling contracts would see a major haircut, but not so much with earthworks.

“By approaching the market in a new and different manner, we were able to save a staggering amount of money,” said Kruger.

A $9-billion expansion to the Kearl oilsands mine started up earlier this year about five months ahead of schedule.

The entire development has been averaging production rates of around 200,000 barrels a day for the third quarter so far, touching highs of 270,000 to 280,000 barrels a day on some occasions. Over the past few months, operating costs have fallen below $25 a barrel at Kearl.

Oil and gas producers have been leaning on their service providers during the downturn to squeeze out savings. Imperial started out by seeking voluntary reductions from contractors, telling them: “Our world is changing and we need you to change with us.”

Company-wide, Imperial is shelling out $1 billion less than originally planned in 2015, between operating costs and capital expenditures.

U.S. benchmark crude prices were hovering below US$45 a barrel on Wednesday, about half of what they were at this time last year.

Like many of its peers, Imperial is aiming to keep its operations viable under current conditions rather than banking on a recovery. Unlike its peers, it has not had to resort to layoffs or wage cuts.

Kruger said this is the fifth time in his 34-year career that he’s seen crude prices drop by more than 50 per cent in six months.

“I would say you never get used to it.”

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