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Jul 21st 2012 | ABERDEEN | from the print edition
A TECHNIQUE called directional drilling has transformed the energy business.
Fifteen years ago the best drillers could force a well-shaft into a gentle arc.
These days shafts can be drilled vertically to a depth of several kilometres
then made to turn sharply and continue horizontally for up to 12km (or 7
miles). Will Grace of Schlumberger, an oilfield services company, likens it to
dropping a plumb-line from the top of the Empire State Building and then
guiding it through the rear and front windscreens of every car parked in the
nearby streets.
Such technology vastly increases the area one rig can cover (see diagram). For
an illustration, Mr Grace points to squiggles and shadings on a computer screen
in one of the 34 offices Schlumberger operates in Aberdeen, a Scottish oil
city. The lines show the progress of a well completed for a Canadian oil firm a
few hours earlier. It is 13,000 feet (4,000 metres) deep and has been brought
to a halt 6,500 feet horizontally away from the rig, within three feet of its
target.
Instruments in the drill-string as formerly inflexible steel drill-shafts are
now called are meanwhile transmitting dozens of additional measurements: of the
radioactivity of the surrounding rock, its resistivity to electromagnetic
waves, and so on. In this case, the rock gives a low radioactivity reading,
which suggests that it is sand; its resistivity is high, which suggests it is
oil-bearing. This is wizardry that few firms can match. And probably none is a
regular oil company.
Oilfield services (OFS) firms such as Schlumberger are the unsung workhorses of
the oil industry. They do most of the heavy lifting involved in finding and
extracting oil and gas. They are far less well-known than the oil firms that
hire them, but immensely lucrative. Schlumberger, with headquarters in Paris
and Houston, earned profits of $5 billion on revenues of $40 billion last year.
Its market capitalisation has risen fourfold in the past decade, to $91
billion. That is bigger than several international oil companies, including ENI
($82 billion), Statoil ($75 billion) and Conoco-Philips ($71 billion).
Schlumberger s success highlights a shift in the balance of power between oil
companies and their flunkeys. Until the 1990s OFS companies were far smaller
and earned low margins on straightforward tasks, such as drilling vertical
wells. That has changed dramatically.
With the price of oil so high, firms are scrambling to pump it out of ever more
remote and costly crevices. Over the past decade the oil industry s annual
spending on exploration and production has increased fourfold in nominal terms,
while oil production is up by only 12%. The big services companies, which
invest heavily in technology (see chart), have been growing by around 10% a
year. According to McKinsey, a consultancy, OFS companies grossed around $750
billion last year.
OFS firms come in three flavours. Some make and sell expensive kit for use on
drilling rigs or the seabed. These include FMC, Cameron and National Oilwell
Varco, all $10-billion-plus companies. Some own and lease out drill-rigs. These
companies include Transocean, Seadrill, Noble and Rowan. The third group
carries out most of the tasks involved in finding and extracting oil. It is
dominated by four giants: Schlumberger, Halliburton, Baker Hughes, and
Weatherford International.
Most of these firms were relatively small until the 1980s, when several oil
companies decided that humdrum drilling chores were no longer worth doing
in-house. Oil was easy then. Drilling yielded low margins that did not justify
its claim on capital, so the oil majors outsourced it. This gave OFS firms
space to grow.
They grew even faster in the early 1990s, when a tightening oil market drove
demand for new technology. This led to breakthroughs in 3D seismology and
directional drilling. These breakthroughs allow oil to be sucked economically
from far beneath the ocean floor, and out of depleted and formerly abandoned
wells.
But such inventions do not come cheap. Schlumberger invests roughly $1 billion
a year in research and development, a level it maintained even during the slump
after the 2008 financial crisis. That is as much as the mighty ExxonMobil
spends; as a share of sales, five times more. The big OFS companies now
probably file more patent applications than the oil majors, whose technological
skills are largely interpretive. (For example, an oil major may decide where
and how to drill based on geophysical data provided by an OFS firm.)
The oil business is likely to grow even more dependent on brainy OFS firms.
Global production from mature oilfields is falling by between 2% and 6% a year.
In the North Sea it has declined by 6% a year on average since 1999. With
global demand for oil growing by 1-2% a year, there are persistent fears of a
supply shock. Hence the current high oil prices: even after a 20% fall in
recent months, Brent Crude is now around $100 a barrel. Oil firms are searching
harder in more remote places, such as the Arctic and the deep seas off Brazil.
Operating in such places will require yet more snazzy technology.
With hindsight, the oil companies decision to outsource the grubby bits of the
job looks like an opportunity squandered. It has also left the oil firms
hostage to the availability of increasingly expensive and sought-after
services, from advanced drilling to deepwater rigs, which a dwindling number of
OFS firms can provide.
There is, at present, still a fair amount of competition in most parts of the
services industry. Each big OFS firm has different strengths, and plenty of
smaller ones occupy specialised niches. Yet in some areas, especially the
geographically remote ones, the demand for complex services often outstrips the
supply.
Even worse for the likes of Exxon and BP, this has come at a time when
state-owned oil firms have been muscling onto the stage. In the past couple of
decades these national oil companies have claimed the best acreage in most old
oilfields. The OFS firms have helped them to do so. Where once the state-owned
giants hired oil majors to do the work, now they can manage projects themselves
and hire technical help directly from the services firms. This can sometimes
involve a limited sharing of risk between national and OFS firms, just as in a
regular joint venture between oil companies.
Schlumberger, for example, will agree to a measure of payment-for-performance
in big contracts. If it can drill more oil from a well than the contract says
it must, it charges a higher fee. Other services firms have gone further,
taking small equity stakes in exploration projects.
Some analysts wonder how all this might hurt the oil majors. A few decades ago
national oil companies had to turn to oil majors for the technology required to
get the stuff out of the ground. Today, oilfield service companies offer all
the necessary technology and are increasingly willing to take on some of the
same risks as an oil company, notes Marcel Brinkman of McKinsey.
Still, it would be wildly premature to bid Exxon adieu. Schlumberger s
performance-based contracts are a long way short of owning reserves something
the company says it will never do. It lacks the mammoth balance-sheet that oil
firms maintain to manage the huge risks in oil exploration. It also lacks Exxon
s expertise in managing huge projects. And it is reluctant to annoy its
customers by competing with them. Moreover, choosing where and how to explore
(another strength of the oil majors) is trickier than you might think.
Instead, Schlumberger is planning more of what it is best at: pushing the
technological boundaries of extracting the black stuff. It has recently been
busy making acquisitions including of Smith International, an American
drill-bit company, for $11.3 billion which have given it know-how in most
segments of exploration and production. It now hopes to re-engineer the entire
process.
The prize of increased efficiencies delivered in barrels of money, not oil
could be vast. A big deepwater drilling rig costs half a million dollars a day
to rent, and can take three months to drill a complicated well. Any OFS company
that can shave a few days off that time will be in the money. Drilling is
thrilling, and getting more so.
from the print edition | Business