Oil Service Titans Gaining Power Vs Big Oil

ARABIAN MIGHT

For decades, anyone with oil ambitions felt they had little choice but to court a major, going all the way back to the firm that became Chevron Corp setting up the Arabian American Oil Company: Saudi Aramco, now the world’s top energy producer.

Would-be Aramcos today, or even those with less lofty goals, can buy much of the technology directly from services companies.

Alan Kleier, a Chevron executive who spent seven years in Angola, saw a dramatic change in how that country pushed for local hiring as it built up expertise, and said many of his staff gravitated to the NOC, Sonangol. But he believes majors still bring a lot to table in terms of technological expertise.

“Do I think there’s a day when they do it all themselves?” he said of Sonangol. “They may work toward that, and the day may come. But they’re still probably years away.”

In Brazil’s case, Petrobras has built up so much experience in its ranks that it is even trying to build a services industry at home. “They see the size of their reserves and say ‘We have lots of time in front of us, we can do it’,” Gould said.

So service firms fall over themselves to get close to NOCs. Near Aramco headquarters in Dhahran, Baker Hughes just opened a research center, while Schlumberger has been there since 2006.

Schlumberger towers over others in its geographic reach and scale. After tripling in value in the past decade, it would rank among the top 10 market-traded oil companies by value; Schlumberger’s market capitalization of $90 billion puts it within range of BP and Total. By comparison, Exxon grew by 162 percent in value in that time, and Shell 59 percent. The share of the top three services companies in the S&P energy index is now a tenth, up from 8.5 percent 10 years ago.

Many national oil companies have clear advantages, not least the deep pockets of their state backers and an implicit home oilfield advantage.

In February, Petronas had Halliburton put a technical center in Kuala Lumpur focused on shale gas and oil, indicating its own ambitions in unconventional drilling. Petronas is also trying to buy Canada’s Progress Energy Resources.

Eric Gordon of Brown Advisory in Baltimore, which has about one-eighth of its $29 billion in assets in energy, said all this new competition for access to oil means contracts between oil-rich countries and the majors will grow less favorable still.

“It’s a concerning trend for anyone investing in the oil majors,” he said, noting they already have to spend far more to get less because the “easy oil” is gone. “The capital intensity continues to rise, yet their ability to generate profitability relative to oil price movements has become less impressive.”

TECHNOLOGY FOR ALL

Independents, in a further blow to big oil’s dominance, have led the way into crucial new developments such as North American shale gas.

One such company is Ultra Petroleum Corp, whose CEO, Mike Watford, began his career with Shell. Watford said the rebalancing of research and development (R&D) spending over the years to the services companies had been a clear benefit for smaller players who could suddenly afford the latest technology.

“Now I’ve got access to it,” he said at a recent conference. “The service companies want less of a premium for it.”

Ranking industry R&D as a share of sales, Chatham House put service firms in the top six, then Petrobras and PetroChina , and two independents: Anadarko and Noble Energy.

The cyclical churning faced by technology innovators has been made clear for Halliburton and Baker Hughes this year. Having spent heavily to build up hydraulic fracturing capacity, a collapse in natural gas prices left the industry oversupplied.

For Schlumberger the relative impact of the gas glut was far less given its greater global reach.

The power to maintain steady prices is vital for the services companies, as Gould made clear at an industry conference in Houston back in 2009. Schlumberger’s customers were grappling then with a dramatic drop in oil prices, and calling for service rate cuts to help out, to which he quipped: “When did the bill from your plumber last go down?”