Oil services: Boom time for ancillary sector

18 April 2008
International oil services firms are increasingly winning work in the region as state oil companies call on their advanced technology and expertise to boost crude production.

In the Eastern Province of Saudi Arabia, oil services companies are scrambling to keep up with one of the largest crude capacity expansion programmes ever undertaken. Remarkably, for a country that has kept the door shut to international companies for the exploration of its prized oil fields, three US oil services giants - Schlumberger, Halliburton and Baker Hughes - have established a strong presence in the kingdom and now collectively share billions of dollars worth of work.

More than 150 wells are either being drilled for the first time or reworked as part of Riyadh’s drive to boost oil capacity to 12 million barrels a day (b/d) by the end of 2009, from 11 million b/d currently.

State oil giant Saudi Aramco is also working closely with the three service majors in an ambitious attempt to push the limits of crude recovery to at least 70 per cent at its major producing fields, compared with an industry average of about 30 per cent.

Splitting work

There is so much work on offer that two of Houston’s biggest rivals - Schlumberger and Halliburton - have even agreed to split work on one of the kingdom’s megaprojects to keep in favour with Aramco.

The two firms were recently awarded sep-arate drilling deals by the state-run firm for the 900,000-barrel-a-day (b/d) Manifa heavy oil field, worth up to $1bn in total. Schlumberger has clinched the larger onshore portion of the field, while Halliburton has secured the offshore deal.

While Saudi Arabia is undoubtedly leading the drive, demand for oil services is booming across the region as national oil companies (NOCs) look to take advantage of record energy prices to boost crude production into the next decade.

Oman’s state-led national oil company, Petroleum Development Oman (PDO), has tapped Schlumberger’s expertise in wireline services, while Schlumberger has been assisting Qatar Petroleum in handling a massive ramp-up in data from its well-log exploration efforts in the North field.

Halliburton recently concluded a five-year technology deal with Kuwait Oil Company focusing on reservoir management and well technology, while also working with Egyptian General Petroleum Company (EGPC) on a deal to alter water production on a major well in the Gulf of Suez.

Technological innovation

Baker Hughes has developed an innovative water-based mud system to eliminate mud losses from drilling in the Libyan desert, while also carrying out seismic and gravity work in offshore Algeria.

One Houston-based oil services analyst says the big three services companies are constantly hunting for innovations to help NOCs in the region. “There is a real dog fight between these guys,” says the analyst. “If one comes up with a really smart product, the others will be looking to move it on in some other way. It is good for the overall development of the oil business.”

Services firms are also devoting more of their resources to the Middle East, aware that existing projects on which they previously relied, in locations such as the North Sea and Alaska, are drying up more quickly than acreage in the Gulf and North Africa.

Halliburton signalled its intentions a year ago, announcing the relocation of its corporate headquarters from Houston to Dubai, placing the company closer to its most valued corporate customers, such as Aramco and Abu Dhabi National Oil Company (Adnoc).

In February, Baker Hughes revealed plans to invest more than $80m in opening its Middle East and Asia Pacific headquarters in Dubai, incorporating a drilling-screen manufacturing plant.

Regional base

Schlumberger opened its Dhahran Research Center in Saudi Arabia two years ago, the first facility of its kind in the Middle East, and a base for the company to work on research projects in tandem with Aramco, which has its headquarters nearby.

The three oil service majors operate in every Middle East country, except Iraq and Iran, with business booming.

All NOCs are looking to strengthen their reserves base with the assistance of specialist service firms. For Schlumberger, easily the largest oil field services company, with overall revenues of $23.3bn in 2007, profits for its Middle East and Asia unit surpassed those of its North America unit for the first time in 2007, topping $1.7bn, a 40 per cent increase on the previous year. Houston-based Baker Hughes enjoyed an increase in its Middle East and Asia Pacific revenues of 14 per cent in the fourth quarter of 2007.

Its Saudi unit alone recorded a 23 per cent jump in earnings to $481m in the 2007 financial year, almost three times the level it achieved in 2005, making it the firm’s fifth-largest country in terms of revenues.

It now expects Aramco to become its largest single customer, replacing the UK’s BP and the US’ ExxonMobil Corporation, which have historically filled that role.

Halliburton has also had strong growth in its Middle East and Asia business, with completion and production revenue improving by 13 per cent for the fourth quarter of 2007 and its operating income rising by 18 per cent compared with the previous quarter.

One executive at Schlumberger says the emphasis on securing more difficult-to-access reserves throughout most of the Middle East has made oil services companies’ expertise more valuable than ever.

“You can see from looking at the [financial] figures that when easy oil was being pumped in, many of these countries we were not pulling anywhere near the sort of revenues we can command now,” says the Schlumberger executive. “We simply were not needed as much. But now national oil companies need companies like ours as much as we need them.”

Gene Shiels, investor relations assistant director at Baker Hughes, says while there is room for international oil companies (IOCs), service firms are arguably in more powerful positions in many of the key markets.

“Years ago, the IOCs brought money, expertise and technology to the table, and now the NOCs do not need any more money, they can handle the management, which really just leaves technology,” he says.

Oil services companies are still guarded about the type of work they perform for oil firms in the region, with much of their knowledge of NOCs’ reservoir and drilling issues considered highly confidential by the client.

However, all three companies agree that with the era of easy oil over in the region, NOCs are increasingly looking for smarter ways of approaching exploration.

“The easy oil is simply not there anymore,” says Ahmed Lotfy, senior vice-president, eastern hemisphere, for Halliburton. “A straightforward application will not get the reserves anymore. We increasingly work on a lot of technology for tight reservoirs - and also heavy oil. It [heavy oil] is not today’s challenge, but it is tomorrow’s challenge.”

Schlumberger is also heavily focused on long-term technology solutions for its clients. It can point to developing a series of new products with Aramco to aid simulations in sandstone and carbonate reservoirs.

It says a new fracturing and completion service on two deep gas wells in the kingdom’s Khuff formation led to significant production rate increases.

The success of that programme led to the roll-out of similar technology in Saudi Arabia’s horizontal gas wells, while its well services division came up with a new technique for developing a deep, vertical, cased-hole natural gas exploration well. This resulted in a subsequent fracture project increasing production tenfold.

Baker Hughes’ Shiels says that in crude-rich Saudi Arabia, the emphasis is switching from the provision of equipment and manpower to smarter solutions.

“Over the past few years, [Aramco] has been saying ‘bring more equipment in and we will make sure you have work’,” he explains. “Now everyone is staffed up over there but from a service company standpoint, they are looking for the next technology that will drive their fields forward.”

While the three companies tend to be the leaders in terms of market share, others are trying to secure a portion of the proceeds.

Abu Dhabi government-owned Mubadala Development Company launched an oil field services firm in May 2007, buoyed by the firm’s experience with Occidental Petroleum on the Dolphin gas project.

Several years ago, when the three big service firms were struggling to attract new business, there was concern that smaller, more nimble Texan firms such as Weatherford, BJ Services and Smith International could lure much-needed business away.

However, one retired Aramco executive, who worked closely with all three of the largest US service companies, says the best technology and all-round service will win the big projects.

“The competition in the sector is excellent,” says the executive. “If anything, we are seeing technology and technical know-how become even more important to Aramco and all of the other NOCs in the region.

“With oil revenues at record [levels], there is no shortage of money, and there is a real willingness to pay properly for the best services,” he adds.

Key Fact:

Oil services company Schlumberger had an annual turnover of $23.3bn in 2007.

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