Oil service companies adjust to new industry forces

A walk through the Offshore Technology Conference reinforced our view that the oil and gas industry is in transition and that the service industry must follow.

American dominance of this business is ending. The composition of the show’s exhibitors (from 30 countries) and visitors (from 110 countries) supports this view. Today’s oil industry is more international, and the importance of national oil companies (NOCs) is growing. The role of service companies will change as NOCs drive industry growth. The question is, “How will the service industry adjust?”

Thirty-five years ago, a small group of international oil companies (IOCs), whose leaders often met to discuss their dealings with the governments holding the globe’s newly emerging oil supplies, ruled the oil industry. These meetings grew from their operating partnerships, primarily in the Middle East, managing these new oil fields. This small band of executives’ influence over oil prices proved immense, ultimately fueling the development of OPEC. This select oil company club was tagged the “Seven Sisters” by Italian oil tycoon Enrico Mattei.

Today, mergers have reduced the Seven Sisters to four. In terms of industry importance, the capital expenditures of these four, plus France’s Total, shrank from 34% of global spending in 1990 to 26% last year, as spending grew from $100 billion to $220 billion. If the service industry depended exclusively on these IOCs, it would barely be growing.

According to the EIA, an estimated 1.032 trillion barrels of crude oil reserves remain. Those countries restricting petroleum exploitation to their NOCs hold 35% of the world’s crude oil reserves. When countries providing limited access to IOCs are included in this count, almost 60% of the globe’s reserves are restricted. Iraq accounts for another 10% of reserves currently off-limits to IOCs.

Today, the service industry’s focus is on the “new” Seven Sisters - or the most important petroleum companies outside of Europe and North America. The new club includes Saudi Arabia’s Aramco, Russia’s Gazprom, China’s CNPC, Iran’s NIOC, Venezuela’s PdVSA, Brazil’s Petrobras, and Malaysia’s Petronas. These companies control almost a third of the world’s petroleum production and more than that in terms of total reserves, while the “old” Seven Sisters barely produce 10% of the world’s output. The challenge for the service industry is meeting the needs of these emerging petroleum powerhouses.

So what challenges face service companies? Traditionally, IOCs have provided the petroleum technology, project management skills, and money to find and develop new oil and gas fields. Today, NOCs have ready access to money - from strong cash flows, their government’s treasury, or global capital markets, partially raised by service companies. Because IOCs de-emphasized oilfield R&D following the mid-1980s industry recession, the service companies replaced them and now are the primary technology suppliers, affording NOCs a level playing field.

Over time, foreign students began populating US petroleum engineering schools, and now the NOCs have a growing cadre of highly skilled energy professionals. NOCs are no longer dependent on IOCs to manage development of their petroleum resources. This opens up significant new business opportunities for service companies. For example, Baker Hughes recently announced that Saudi Aramco will become its leading customer this year.

To capitalize on these opportunities, service companies must be closer to their customers. As service companies supplant IOCs as the primary operator of field developments, they need to broaden their product and service offerings. Mergers and acquisitions will facilitate this service company growth and expansion. Additionally, they need a more international labor force.

As the global petroleum industry focuses on the Eastern Hemisphere, service companies will be shifting assets, training and research centers, and ultimately management eastward. US service company headquarters will likely relocate abroad. Listing on foreign exchanges will become the norm. Eventually, foreign investors will gain control over a greater portion of the service industry. Rather than merely establishing new service companies as in the past, for example low-tech drilling and boat companies, investing in existing, more technology-oriented companies will be attractive and profitable. More foreign control over oilfield technology could alter the service industry’s evolution.

Houston’s influence on the global oil and gas business is peaking. The shrinking importance of the North American resource base will pressure oil and gas and oil service industries to head overseas for growth. There remain technological and business opportunities in North America as non-conventional natural gas and extra-heavy oil resources are exploited, but the best new service business opportunities will be in regions of the world where American influence is waning and where Americans are less welcome. The day of the American-dominated oil service industry is ending.

Allen Brooks
Managing Director
Parks Paton Hoepfl & Brown

This page reflects viewpoints on the political, economic, cultural, technological, and environmental issues that shape the future of the petroleum industry. Offshore Magazine invites you to share your thoughts. Email your Beyond the Horizon manuscript to Eldon Ball at [email protected].