Oil company or service company?

March 1, 1996
Zeke Zeringue Executive Vice President and COO Halliburton Energy Services With the growth of integrated solutions arrangements and the increasing responsibility given to the major services companies, a great deal of discussion has been generated about the respective roles of the oil company and service company.
Zeke Zeringue
Executive Vice President and COO
Halliburton Energy Services

With the growth of integrated solutions arrangements and the increasing responsibility given to the major services companies, a great deal of discussion has been generated about the respective roles of the oil company and service company.

Traditionally, the oil company provided broadly knowledgeable people who acted as generalists on projects. They had a good basic knowledge of the range of skills required for the projects and, within their frame of reference, a familiarity with existing technology that was applicable to the project. Armed with this background, the generalist then directed the service and supply organizations to provide the various products and services necessary for the activity.

A weakness is becoming apparent in this process. Much of the technology in the industry is developed and applied by the service sector, which possesses a great deal of detailed knowledge and experience. This process does not sufficiently enable the application of new technology or the application of existing technology and procedures outside the knowledge of the generalist. It also does not enable the application of technology across traditional service lines.

By merging the skills and knowledge of the generalist with the detailed expertise available from a major service provider, a better solution is applied. Furthermore, where the necessary technology is not in existence, the opportunity is recognized and technology developed.

Recognizing the drivers for success from an oil company perspective, and marrying reservoir understanding with technology, the service company is able to better provide the optimum solution. Recognizing this, major service companies have begun to hire expertise that would traditionally be resident only in oil companies.

The service company should not, however, be involved in areas that position it to compete with oil and gas companies in their core businesses (prospect acquisition,exploration, transportation, refining, or oil and gas marketing). However, the service company should be willing to take a high level of responsibility for developing oil and gas fields and base financial performance on project results.

In contrast to merely bundling discrete products and services together, effective integrated solutions align interests by encouraging a level of shared risks and rewards for meeting project goals. This alignment can occur within integrated services, lead contractor, field management, or lifecycle management arrangements. These arrangements require the service company to take more responsibility and base compensation on the success or failure of the overall project.

One method for accomplishing this is through incentive/penalty payments that help align mutual interests. Team members stand to gain or lose depending on each other's activities. An incentive plan bases a share of the providers' compensation on one or more performance measures.

Another method is the payment-related-to-production, which is beneficial in helping align the interests of the oil company and service company. This method optimizes the relationship between cost control and the quality of end results. Both parties are measured on the same basis.

In traditional bid arrangements, the solutions have often already been determined. Perhaps one service company has developed a particular technology or process by which the oil company could save significantly in total cost. Each service company, however, is asked to bid only on the baseline product or service.

The industry must shift to a situation whereby the oil and gas companies approach the service companies with the opportunity and information to recommend the optimum solution. The service company should evaluate the challenge, recommend the most effective solution, and share in the risk and reward of applying the solution.

A fully-integrated service company is best able to draw upon expertise and support of its entire organization without logistical or motivational barriers. It can access all technical capabilities across discrete lines to provide well or field solutions. Also, when unique challenges are faced, the integrated service company can more easily work with competitors.

Oil and gas companies are beginning to achieve this cooperation on large scale developments that require significant financial resources. Service companies must also begin to address ways they can work together to provide solutions without compromising their competitive position.

Much of the technology being developed today provides little commercial benefit over a long period of time. In many cases, three or four companies spend millions of dollars to develop the same technology. When technologies do not give a service or oil company a significant competitive edge, the technology should not remain proprietary. Similarly, we must realize that the best solution may not come from one company's portfolio in every project. Companies must be flexible enough to look at alternatives put forth by other providers.

The key driver to encourage application of the best technology is incentive/penalty arrangements. Correctly structured incentives encourage service companies to look inside and outside for the best technology for that application.

Oil and gas companies have an opportunity to spread risks while maintaining proper roles through these integrated solutions arrangements. The ability of service companies to align interests and share in the risks and rewards will be the key to a profitable future for the industry.

This page reflects viewpoints on the political, economic, cultural, technological, and environmental issues that will shape the future of our industry. Offshore Magazine invites you to share your thoughts. Send your manuscript to Beyond the Horizon, Offshore Magazine, Box 1941, Houston, TX 77251 USA. Manuscripts will not be returned.

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