Historically, the world’s biggest oil producers closely guarded their role as operator of their own fields — convinced they alone could deliver the engineering necessary to extract their oil on time and on budget. Increasingly, however, over recent decades those producers have been ceding that role — opting in many cases to manage their assets at arm’s length, and allowing the world’s increasingly sophisticated oilfield services companies to deliver cost-efficient production and, crucially, the oil-field innovation that Big Oil has long assumed it alone could deliver. The speed and manner in which this has occurred varies somewhat by geographic market.
The critical support service companies offer to operations and their handle on technological solutions have enabled national oil companies, integrated majors and independents to manage much more complex operations than they would have otherwise. Despite today’s sharp retrenchment and consolidation among the world’s service companies — driven by the stubbornly low oil price — these companies, from US giants Schlumberger, Halliburton, Weatherford and Transocean to major international players such as Technip, Wood, Aker and Petrofac, continue to offer technological solutions for operations.
As oilfield services companies grow into this space, they handle more risk. The current low oil price environment may accelerate that trend, leading them and oil company operators into new partnerships through which risk can be shared and project delivery optimized.
This thought leadership piece has also carried out unique research of the service company sector in various regions, to uncover the level of technical sophistication of the indigenous service companies and the potential for local value-added-content — an issue of great importance to governments hopeful of developing a high-tech service industry in their country. The results of this regional analysis appear in the back of this report.
Oilfield services companies provide the products and services necessary to construct, complete and produce oil and gas wells. Companies range from giant Schlumberger, whose divisions provide nine out of 10 products and services needed to explore, develop and produce an oil and gas basin, to a single, service company like Geolog, specializing in surface data logging for international and offshore drilling projects.
What makes this diverse group a unique actor in the petroleum sector is its relationship to oil company operators. A manager from a leading French oilfield services company explained that oilfield services companies are in the first row of a project’s pyramid of services and their function is to select and integrate technologies into the project delivery.
The growth of the oilfield services sector is very much a story of innovation and finding solutions to technological and cost challenges faced by operators. “It is a solutions-driven industry,” explains Alan Kennedy of KPMG. Companies grow by developing proprietary technologies and know-how that can be applied across particular projects which then become an accepted industry service and way of operating. Their specialization and repeat use of services allow them to achieve economies of scale on technology development — something oil companies cannot do to the same degree.
The industrial evolution of the service sector is also characterized by integration of services. Companies strive to offer more services across the value chain. Schlumberger has the widest provision of services along the whole value chain, but competitors have similar strategies and this is, for example, a driver of the BakerHughes-Halliburton tie up.
In the NOC market, it has been driven by the customer’s preference for ‘single company’ and ‘single contact’ solutions. These drivers are well explained by Waleed Al Hashash, a former Deputy Managing Director at KPC, Chairman of Aref Energy and CEO of Rubban Logistics Kuwait: “Most NOCs would love to see these (big service company) guys more because they do everything in one contract. And this is something good for somebody who is tied up with a long chain of local government tender procedures. So you talk to someone like Schlumberger and they can bring you your breakfast to the derrick, as well as huge equipment under contract. The Schlumberger philosophy is propagating while small companies push to be able to offer more services.”
Integration has also been driven by downturns in the industry and the need to reduce costs through economies of scale. In the current low oil price environment, integration is being pushed through mergers and acquisitions. Schlumberger, for instance, acquired Cameron International last August, bringing with it more products and services that are required through the whole life of the field. Cameron’s expertise lies in surface equipment, rig equipment and subsea equipment. Much as the oil majors integrated into the downstream to offset lower profits in the upstream when crude prices fell, oilfield services companies look to be present in different activities in the field life cycle.
According to Spears and Associates, in 2010, 5percent of a major service company’s sales were integrated services. In 2015 the number was 15 percent and in 2020 it will be 25percent. The industry is moving toward integrated project management handled by service companies and this model favours the major service companies.
US onshore may be less likely to follow this path to integration because the US supply chain is a well-oiled machine, according to Richard Spears. Shale wells in Turkey, for example, may cost US$20 million, while the same well in the Eagle Ford costs US$6 million thanks to the available and competitive supply chain. This difference illustrates the potential downside to the industry from integration, as it threatens to reduce the very competition that lowers costs and stimulates innovation and research.
Outsourcing: A driver for the service industry
Until the 1960s, the oil majors handled the multiple facets of operations in-house and they conducted in-depth research into drilling, completion and production technologies. In the 1980s, these were then licensed to the oilfield services companies.Functions such as drilling yielded low margins and diverted the attention of operators and they increasingly outsourced them to specialized companies with a greater ability to drive efficiency. They encouraged the establishment of companies to handle these services, such as drilling, reservoir engineering, procurement, construction, laying down pipes, supporting ongoing production and maintenance. Since that era, however, oil companies have not maintained the same level of in-house expertise in technology research and development.
National oil companies, such as Kuwait Oil Company (KOC) and Saudi Aramco, also outsourced these functions and have focused their resources on overseeing operations. Waleed Al Hashash explained, “They have guys on the ground just making sure the drilling companies are doing their job. Coordinating. Giving the orders. But the real operations on the ground are done by private (service) companies. There has been a big shift in the philosophy of how to operate in the last two to three decades.” The NOCs are focusing on the interpretative work, which involves deciding where to drill and how. They are supported in these decisions by international service companies but the final decision rests with the NOCs. As Al Hashash puts it, “They would not say, ‘Ok here is a lump sum and a piece of land. Operate it and give us 50,000 barrels a day.’ The final say, the full picture, is still in the mind of KOC. KOC calls the shots.”
While the final decision on drilling rests with the operator, it is clear that the transfer of much of the execution responsibilities to service companies has meant some operators have less of a granular knowledge of their geology. They are more dependent on external capabilities and experts, particularly when tackling new geological challenges.
The consequence of outsourcing technology development
Services that were initially low value grew more sophisticated as oil prices fell in the early 1990s and operators required technological innovations to develop oil more cheaply and access new geology. In this cost-cutting era, oil companies decreased their R&D expenditure, while service companies ramped up investment. This led to breakthroughs in 3D seismology and directional drilling.
Today, some oilfield services companies spend more on R&D than oil companies as a share of total revenues. The service companies have incentives to do so: they can effectively sell their technology to multiple customers. Innovation has segmented the industry between service companies focused on developing technology and carrying out execution and oil companies integrating multiple technologies and managing overall risk.
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Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.