Oilfield Services
Industry
Oil Exploration and Production is a complex process, and each step of the oil supply chain involves specialized technology. Oil reservoirs are identified through geological field work, geological modeling, seismic imaging and exploratory drilling. Oil is then extracted with production equipment and transported in tankers and pipelines. Oil refineries refine crude oil into various marketable end products including gasoline, diesel fuel, jet fuel, marine fuel, petrochemical feedstocks and other chemicals. Most oil companies, even vertically integrated giants like Chevron and Exxon Mobil, don't build the equipment needed to complete all of these difficult and costly tasks. Instead, oil companies turn to engineering and industrial firms that build and operate the oil rigs, tankers, and pipelines that are the backbone of the industry. These oilfield services companies provide the infrastructure, equipment, intellectual property and services needed by the international oil and gas industry to explore for, extract, and transport crude oil and natural gas from the earth to the refinery, and eventually to the consumer.
[edit] Companies Involved in Oilfield Services
[edit] Diversified Oilfield Services Companies
These companies deal in a wide range of oilfield services, allowing them access to markets ranging from seismic imaging to deepwater oil exploration.
[edit] Oilfield Equipment Companies
These companies build rigs and supply hardware for rig upgrades and oilfield operations.
These companies deal in seismic imaging technology for oil and gas exploration.
These firms contract drilling rigs to oil and gas companies for both exploration and production.
[edit] Oil and Gas Pipeline Companies
These companies build onshore pipelines to transport oil and gas between cities, states, and countries.
[edit] Oil and Gas Maritime Transportation Companies
These companies supply the tankers and service staff needed to get large quantities of oil and gas across the ocean.
[edit] Oilfield Services Overview
Oilfield services companies provide the equipment and services used in the exploration for and extraction of oil and natural gas.
[edit] Seismic Imaging[1]
Seismic imaging bounces concentrated sound waves off of underground rock formations and picks up the returning wave patterns; computers then analyze the data to "see" below the surface of the earth. These imaging techniques are useful for determining if there is oil or gas in the ground and, sometimes, how much of it there is - all without causing the environmental damage and racking up the dayrate costs that come with exploratory drilling.
[edit] Oil Well Equipment and Services
Most oil and gas companies don't build their own drilling rigs; for this, oil well equipment companies offer drill bits, lubricants, pumping equipment, subsea "trees", and even entire rigs for purchase and contract.
There are a number of companies that provide onshore and offshore drilling equipment for conventional, unconventional, and deepwater oil exploration. These "rigs" are used for a variety of purposes, though most often they are used to try and "strike" oil (exploration) and to get down to it once it's been found (production).
Onshore drilling rigs are usually pretty simple; they are drills attached to platforms that can usually be towed from place to place. Increasingly, as easy-access onshore reserves are being sucked dry, contractors are outfitting their land rigs with drills, drill bits, controls, and fluids that allow the drills to be maneuvered through trickier geology, which is how regions previously thought to be mature, like the Middle East, are seeing increasing productive activity.
The offshore sector is much more diversified, as there are many types of offshore drilling rigs.
- Jack-ups are rigs that are suspended above the water by retractable legs that are "jacked down" to the sea floor when putting the rig into operation.
- Semisubmersibles are rigs that are suspended above the water by large legs that are connected to pontoons suspended below the water level.
- Drillships are simply large boats that have been modified with drilling equipment.
- Floaters are platforms that float, are outfitted with drilling equipment, and are anchored to the ocean floor with chains.
Currently, the emerging difference between these types of offshore drilling rig is whether or not they can easily be used for deepwater drilling. Those that float without being anchored down (semisubmersibles, drillships) are much more likely to be outfitted with high-cost, high-risk, high-yield deepwater and ultra-deepwater drills (which can go as deep as 9,111 ft of water[2]) than rigs that must somehow be attached to the ocean floor.
[edit] Rig Equipment
While many rig contractors build their own machines, oil rigs are far too complex for any one company to develop every single part required for them to work effectively. Furthermore, a contractor could have rig equipment that is outdated, and might want to spend on upgrades instead of building a new ship. For this reason, rig contractors often turn to equipment suppliers purchase a range of rig parts, including:
- Drill pipes: Drill pipes are the "drills" on oil rigs - they connect the drill bit, which cuts into the earth, to the rig itself. After the rig platform, the drill pipe is the second most important part of a rig; it is also the part of the rig that is second most likely to get damaged, after the drill bit, because it is constantly in contact with the area being worked on. Because of this, when demand for drilling increases, so does demand for drill pipes, though a current decline in land rig capital expenditure means that the positive effect a booming offshore drilling business will have on the drill pipe market will be offset.
- Drill bits: Drill bits are the part of the drill that bore into the rock protecting the rich resources underneath. Companies that produce drill bits are benefiting from growth in drilling markets with increasingly complex geology, like Russia and the Middle East, as touch rock and tricky formations mean more broken drill bits - and more replacement sales. Eventually, however, exploring companies are going to get tired of purchasing new drill bits, in which case producers of versatile, high-efficiency bits will benefit.
- Fluids: Fluids grease the drill bit, drill pipe, drill machinery - anything that comes in contact with anything else. They are used to keep the drilling equipment lubricated, cool, and moving smoothly, in order to reduce the incidence of damaged hardware. Growth in the market for any other high-contact drilling equipment would necessarily mean growth in the market for drilling fluids.
[edit] Completion and Production Equipment
Once oil has been found and a well has been drilled, oil and gas companies must extract it without losing spills, and without incurring environmental damages that could subject them to costly fines. To this end, oilfield services companies provide the technology needed to prepare a well (completion) to get oil and gas out of the ground quickly and efficiently (extraction). Some of the equipment needed for proper completion and extraction includes:
- Pumps: Oil companies use pumping equipment to "suck" the hydrocarbons out of a well. A common method of doing this involves pumping a high-pressure gas into the reserve to decrease the weight of the oil and increase the pressure in the well - a technique known as "pressure pumping".
- Flow Control Equipment: Once the oil/gas in a reserve has been pressured and is ready leave the well, its flow much be controlled to prevent spilling and accidents while maximizing output. Flow control equipment consists of a complicated series of pumps, pipes, valves, and monitoring devices that are connected from the well to wherever the extracted hydrocarbons are stored. In offshore wells, these setups are call "Christmas trees".
[edit] Oil and Gas Transportation
Once oil and natural gas have been extracted, they must be transported from the rigs to refineries, and then from refineries to distribution centers. At sea, they are transported in supersized tankers operated by a number of maritime transportation companies. On land, it is transported through pipelines that can span entire continents, built by companies that rent pipe space to oil and gas vendors.
[edit] Oilfield Services Trends and Forces
- Oil Prices, Supply, and Demand: Oil prices rose over $40 per barrel in the last four months of 2007, and have fluctuated over $100 per barrel since early March of 2008[3]. One of the main reasons prices are so high is that emerging markets like China and India need increasing amounts of energy to fuel economic growth; concurrently, the supply of oil has been constrained by the cartel OPEC and, some speculate, by the condition of peak oil leading to production declines in many oil-producing countries[4]. Together, these high-demand, low-supply conditions have driven the price of oil into the sky. Now, oil and gas companies have greater incentive to increase production, as greater production would mean more revenue and, with high oil prices, higher margins. To increase production, however, they need increasingly complex technologies, from more efficient extraction techniques to deepwater exploration capabilities. This demand has driven capital investment in the oilfield services industry, as companies seek to provide the technology that will enable oil companies to get at reserves never before accessed, and it has driven increased demand for existing rigs, driving dayrates up as oil companies seek to expand production worldwide.
- Lack of Rigs: Worldwide, 93% of jackups, 97% of semi-submersibles, and 100% of drillships are currently being utilized, with very few new offshore rigs coming online in 2008[5]. This makes significant offshore growth in 2008 relatively unlikely, as capital is already being used almost to capacity. With oil prices so high, rising demand will drive up oilfield services rates, as oil and gas companies must compete for oilfield services business.
- Age of Rigs: The average drilling rig found anywhere in the world is about 25 years old[6]; while this technology may have been appropriate for extracting the easy-access oil that was right below the surface, as these reserves dry up companies are looking to deeper water and more complicated technology. Rig contractors and exploration companies worldwide are beginning to invest in building new rigs or upgrading old ones, taking advantage of the high margins caused by the current oil price level's effect on dayrates to spend on expensive technology. This spending has been met with high demand, as oilfield equipment companies are increasingly seeing record-level orders and backlogs[7] for new and upgraded rigs.
- Deepwater Oil Exploration: The hot new trend that has recently arisen in the oil industry is deepwater drilling - with shallower wells yielding less and less, and with potential profits through the roof thanks to high prices, oil and gas companies are paying the big bucks to oilfield services companies who can drill where they couldn't drill before. Though deepwater success rates have only averaged around 30% since 1985 (before which they averaged 10%)[8], newer technology means these numbers are increasing, and with oil prices so high, exploratory drillers have the pocket money to fund such risky ventures. There are currently a limited number of deepwater and ultra-deepwater drills in the world, putting a premium on their contract prices; companies that own and contract deepwater rigs, as well as those that build them, are seeing prices, revenues, and backlogs skyrocket as oil and gas companies dig deeper into their wallets to drill deeper into the seabed.
- Mature Well Extraction: Many companies are attempting to extract more oil than before from existing wells, using complex new technologies - this is the primary driver of increased investment in Middle Eastern oilfields. Most of the more accessible reserves in the region have already been developed, but companies are now looking to get more out of them, and to extract from more difficult terrain. This has driven demand for oilfield equipment that can access and extract from the more complex geological formations that made draining a reserve previously impossible. Though these technologies were previously too expensive for oil companies to take interest in, the current level of oil prices means that there is enough cash flooding the industry to fund investment in this hardware.
- Seasonality: Whenever rigs are set up in regions that have turbulent storm seasons, they are at risk of receiving costly damages. Furthermore, oil and gas companies often cut back on production when storms are passing through to avoid worker injuries and other problems, lowering revenues for oilfield services companies. Third-quarter income for companies with rigs in the Gulf of Mexico tends to lag when production is brought down to prevent damage from the hurricanes that sweep the coast in late summer. Similar problems exist during the fourth quarter for companies with rigs in the turbulent North Sea, as well as in the snowier regions of Russia.
- Renewable Energy Threat: Whether it’s because of climate change fears, the rising price of oil, or the desire to separate energy needs from terrorist regimes, people are slowly becoming disillusioned by the world's dependence on oil and gas. Many developed, politically-progressive regions like Europe are beginning to transition away from these sources of energy, and towards renewable energy. In emerging markets like China and India, however, the drive for economic growth supersedes environmental concerns, and oil, despite being about $100/bbl, is still less expensive than most renewables - though growing popular and legislative support for renewables in these regions threatens oil's long-term dominance. Any decline in oil demand will lead to a decline in oil prices - and a decline in demand for oilfield services.
- Terrorism and Political Turbulence: Turbulence in the Middle East poses a threat to many oilfield services companies because the region is a smoldering hotbed of drilling activity. Oil rigs, as "western establishments", would be likely targets for terrorist attacks. Aside from harming the employees at such facilities, terrorist attacks could slow production and effect costly damages to expensive equipment - all leading to declines in regional profitability. Political instability in many oil producing regions also threatens the operations of oilfield services companies through the possibility of violence or asset nationalization; the latter was seen recently when Hugo Chavez of Venezuela seized the assets of multiple oil majors (Exxon Mobil, ConocoPhillips, Royal Dutch Shell) in 2007.
- ↑ http://www.cpeo.org/techtree/ttdescript/seisim.htm
- ↑ BNET: "Optimizing deepwater rig use; new records - report on ultra-deep water rig utilization and various new drilling records from around the world - Brief Article - Industry Overview - Statistical Data Included"
- ↑ http://www.oil-price.net/index.php?lang=en
- ↑ http://www.theoildrum.com/node/2693
- ↑ Q4 2007 SLB Earnings Transcript, Page 3
- ↑ "Maersk plans major drilling fleet expansion", February 1st, 2008
- ↑ "National Oilwell Varco Q4 2007 Earnings Call Transcript", Page 2, February 6th, 2008
- ↑ "The Global Deepwater Play: A Historical and Geological Perspective 27 Years After First Discovery" by Henry S. Pettingill
Companies in the Oilfield Services Industry (47)
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