Solutions for OFS industry doldrums

Since 1982, various sectors of the oilfield service (OFS) industry have complained of the poor economics of the business. Today, we continue to see reports that the industry has excess capacity and that prices are too low.

Pradeep Anand
President, Seeta Resources

Since 1982, various sectors of the oilfield service (OFS) industry have complained of the poor economics of the business. Today, we continue to see reports that the industry has excess capacity and that prices are too low. There is a growing corporate chorus that unless customers do something, a valuable resource will disappear, at a great loss to the industry. This is the wrong answer. The right answer is for OFS firms to focus on solutions and changing business models to deliver them from these doldrums.

For customers to pay premium prices for services, firms have to offer unique, premium value. Uniqueness plays a key role in extracting premium pricing for products and services delivered to customers; however, time blunts the competitive edge because of two tendencies that invite competition.

First, oil companies prefer to have more than one supplier to maintain pricing discipline. The second is the tendency of those fortunate to have unique proprietary technologies to create huge price umbrellas that invite competition to creep in at the edges. The stark reality in this dynamic competitive environment is that firms that stand still will mature and disappear, size not withstanding.

There have been bright spots of growth in the industry, despite poor economic conditions during the last 20 years. These bright spots offer insights into how the industry has to evolve in order to stay competitive and profitable, delivering value to shareholders.

These bright spots satisfied basic customer expectations:

  • Reduced cost of customer operations
  • Improved efficiencies or productivity of customer operations
  • Delivered a reasonable return on investment
  • Priced competitively.

The all-important question is: Where do OFS companies find those technologies and processes that meet these criteria? History tells us that these opportunities lie in three areas:

  • Finding low-cost alternatives to reduce cost of operations. Focusing on core competencies is not only a mantra for oil companies but also for OFS companies. Service companies need to recognize their core competencies and outsource their non-core activities, including knowledge-related ones, to global low-cost alternatives

  • Absorbing people and processes at oil companies, and its supply chain. OFS companies have traditionally absorbed oil company activities; however, a quiet revolution that is taking place is that some service companies have been absorbing adjoining capabilities to deliver more economical and effective integrated services to the E&P industry. For example, drilling-service companies have transformed themselves into either well-construction companies or reservoir-delivery companies

    • Commercializing technologies that are born in oil companies' R&D departments. R&D efforts at oil companies and service companies have often spawned technologies such as 3D seismic and MWD/ LWD to the benefit of the E&P industry. A recent example is expandable tubulars, born in Shell research, with commercialization through Halliburton and Weatherford.

      In these tough times, the "fastest-time-to-bottom-line" is of prime importance. Using this criterion, low-cost alternatives is the leading choice, followed by absorbing and integrating processes from the adjoining sectors of the supply chain. Oil companies' low propensity to adopt innovation makes the third alternative a risky proposition, with long lead times, and short half-lives.

      Low-cost solutions

      A leading candidate in reducing costs is IT-related services. Forrester, a Cambridge, Massachusetts, technology-research firm, said, "A growing base of companies are shifting a range of IT, back office, customer service and sales operations offshore to cut their costs by upwards of 50%." Low-cost bandwidth and a huge increase in capacity means that firms can ship huge volumes of data, documents, and processes overseas cheaply, while standardized software and hardware applications make it easier to hand work off to workers in other countries, Forrester said. For example, major software development firms such as Oracle Corp. and i2 Technologies Inc. have recently moved work to low-cost centers in India. Other US and European firms have set up remote operations in India, including global giants such as Aetna, AIG, American Financial Group, AXA, British Airways, Cisco, Citibank, Conseco, Eastman Kodak, Ford Motor Co., General Electric, Intel, Microsoft, Motorola, Nestle, Oracle, Philip Morris, SAP, Texas Instruments, World Bank, and many others.

      When Jack Welch was at the helm of GE, every operating and strategic plan review required operating units to include plans for Remote IT-enabled (RITE) operations in India. Using RITE services is a long-term strategic initiative at GE. General Electric Capital operates centers in India. In addition to running call centers, GE Capital performs RITE services for other GE companies.

      Halliburton, the world's largest oilfield service company, sees RITE services as one of the many thrusts to improve its economics. One of its RITE vendors is Scicom, which focuses on high-end software support and development for the oil and gas industry. Scicom's expertise in visualization and data-management across multiple platforms and frameworks not only finds applications in seismic interpretation, data processing, drilling, geology, and production but also in medical imaging and semiconductor testing industries.

      Other examples of potential cost reduction are: seismic processing centers, design and cad services, IT infrastructure maintenance and support, project administration services, document management, and many more.

      Of course, there are risks in changing business models. In 1983, the oil industry debated endlessly about the risk of using nuclear sources in MWD tools to provide real time logs. In 1986, when oil prices plummeted, this debate was muted and risks mitigated by the dire economic need to use all possible technologies to improve finding costs, fast.

      Similarly, today, the industry has little choice but to mitigate the risks of changing business models to improve its economics. There are always low-cost alternatives, and choices need to be made. The winners will be the fastest and the best implementers of RITE services.

      Pradeep Anand is president of Seeta Resources (www.seeta.com), a consulting firm focused on improving business performance. He can be reached at pradeep@seeta.com and 281-265-9301.

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