Oil Service Titans Gaining Power Vs Big Oil

Albert Einstein once wrote that he would rather have been a plumber than a physicist because of the independence it would allow him. Faced with the growing power of big oilfield service firms – playfully derided as “plumbers” by some in the industry – many oil men might now feel the same way.

Breakneck expansion across the energy business in the past decade has seriously leveled the global playing field, leaving the oil “majors” exposed to competition in areas where they once reigned supreme.

One factor behind the shift is the emergence of the plumbers as guns for hire by anyone who needs their world-beating skills. The client lists of Schlumberger Ltd, Halliburton Co and Baker Hughes Inc increasingly bulge with state-backed national oil companies (NOCs) and ambitious “independents” – as oil companies without refineries are known.

In the past, NOCs such as Brazil’s Petrobras or Petronas of Malaysia may have relied more on one of the majors for their engineering expertise when developing an oil field. Now, they can go straight to a services company without having to offer equity in oil developments to outsiders.

Schlumberger, the clear global leader in services, says national oil companies and independents account for three-quarters of the industry’s capital spending. Among Schlumberger’s top 30 clients, the share of 2010 revenue from majors was down to about 20 per cent from 33 per cent in 2002, while the NOC share had doubled to 32 per cent.

The reversal of fortune is clear even in deepwater drilling, or wells in 4,000 feet (1,200 m) of water or more. A review of data on discoveries worldwide shows that, so far this year, only six of the 38 finds were made by the likes of BP, Shell or Eni, whereas majors made more than half the 26 discoveries in 2006, when deepwater drilling first took off.

The wider oil game has changed so much that even Exxon Mobil Corp is left to sign simple fee-per-barrel deals, as it did in Iraq, with no provision for payouts to rise in tandem with oil prices, according to a report on the oil business from London think-tank Chatham House.

“Companies may think such deals give them a ‘foot in the door’,” the report said. “But the handle remains on the inside.”

Exxon is now exiting its $50 billion Iraq project in favor of a deal in autonomous Kurdistan to the north.

Seasoned oil executives are certainly quick to caution against overstating the relative decline of traditional Big Oil.

Robert Herlin, the chief executive of Evolution Petroleum Corp who was a board member at services company Boots and Coots before it was bought by Halliburton, said services firms had to tread carefully when stepping into the shoes of the majors.

“You don’t want to be competing with your customers,” Herlin said, adding that keeping up with new technologies took a lot of time and capital. “The services business is a tough business, because you’re always at the tail end of the cycle.”

Still, the shifting balance of power is significant. Andrew Gould, who was Schlumberger’s CEO for a decade before leaving this year, sees risks for Western oil majors if their drilling prowess is matched by the countries that have much of the oil.

Having crossed the services divide to be chairman of oil and gas firm BG Group Plc, Gould warns that NOCs are ambitious and quick to learn. He said some boast a technical depth on par with the majors, which could even threaten Western energy security.

“Unless we refocus, we’re in danger of handing our technology lead irrevocably to the emerging petroleum nations,” the UK-born executive said at the Chatham House report’s launch last month. “And given our continued reliance on fossil fuels … I’m not sure that this is very wise.”