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Avinash Gandhi

Michael McGillen

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.

Companies Involved in Oilfield Services

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.

• Schlumberger
• Halliburton
• Baker Hughes
• Weatherford International.
• BJ Services Company

Oilfield Equipment Companies

These companies build rigs and supply hardware for rig upgrades and oilfield operations.

• National-Oilwell Varco
• FMC Technologies
• Cameron Corporation
• Weir SPM Oil & Gas

• Zhongman Petroleum & Natural Gas Corpration

Oil Exploration and Production Services Contractors

These companies deal in seismic imaging technology for oil and gas exploration.

• ION Geophysical Corporation
• CGG Veritas
• Brigham Exploration Company
• OYO Geospace

These firms contract drilling rigs to oil and gas companies for both exploration and production.

• Transocean
• Diamond Offshore Drilling
• Noble
• Hercules Offshore
• Parker Drilling Company
• Pride International
• ENSCO International
• Atwood Oceanics
• Union Drilling
• Nabors Industries
• Grey Wolf
• Pioneer Drilling Co
• Patterson-UTI Energy
• Helmerich & Payne
• Rowan Companies

This graph shows market share for the United States' contract onshore drilling market in FY 2007. Market share is determined by the number of rigs owned and operated by the respective drilling companies.^{[1][2][3][4][5][6][7][8]}

Oil and Gas Pipeline Companies

These companies build onshore pipelines to transport oil and gas between cities, states, and countries.

• Enbridge
• Kinder Morgan
• Transcanada Pipelines
• Enterprise Products Partners L.P.

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.

• Tsakos Energy Navigation
• Frontline
• Overseas Shipholding Group
• General Maritime
• Ultrapetrol (Bahamas)
• Teekay Shipping
• Tidewater (TDW)

Oilfield Services Overview

Oilfield services companies provide the equipment and services used in the exploration for and extraction of oil and natural gas.

Seismic Imaging

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.^[9]

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.

Rigs

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^[10]) than rigs that must somehow be attached to the ocean floor.

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.

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".

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.

Oilfield Services Trends and Forces

Financial results for first half of 2009 show signs of recovering international drilling activity

For both Schlumberger and Haliburton, international operations showed signs of recovery as drilling activity begins to stabilize in the second quarter of 2009. Schlumberger's oilfield services revenue slumped 31% in North America but dropped 3% internationally.^[11] Haliburton and Weatherford reported similar earnings.^[12] Although prices are far below 2008's highs, the rise in prices has led oil producers to resume drilling. International drilling increased especially in countries with developing economies such as Russia, Mexico, Norway and China.^[13] Internationally, oil and natural-gas prices rose in the second quarter, and rig counts increased slightly in June. More drilling activity outside of the U.S. has the potential of benefiting international oilfield services companies like Schlumberger, Haliburton, and Weatherford.^[14] However, North America produces primarily natural gas and has not experienced that same increases in drilling activity due to low natural gas prices.^[15] Drilling activity has the potential of remaining low as long as natural gas decline.^[16]

Baker Hughes and BJ Services merger has the potential of being one of many as service companies seek to diversify their operations

The $5.5 billion dollar deal is the first major merger since oil prices collapsed in July 2008 and the largest merger in the oilfield services sector since 1999.^[17] Through the merger, Baker Hughes' pressure pumping operations have the potential of comprising 20% of the company's annual revenue. In the first half of 2009, pressure pumping accounted for 1% of Baker Hughes' revenue.^[18] The two companies struck the deal at a time when North American onshore shale gas prices are dropping despite rising prices for other commodities. While the deal expands the number of services offered by Baker Hughes, it also expands BJ Services' international presence; 73% of BJ revenue comes from operations in North America.^[19] With oil prices and production rising, several other oilfield service companies have the potential of merging in order to diversify the services they offer and expand their geographical presence.^[20]

In particular, oil production and exploration companies are spending billions of dollars in 2009 to uncover deepwater oil fields in the Gulf of Mexico, Brazil, the North Sea, and West Africa. As a result, larger service companies like Schlumberger, Weatherford, and Haliburton are looking to acquire or merge with small niche players in order to increase their presence in these deepwater hot spots.^[21] Many of the small companies are cash strapped and unable to acquire additional lines of credit.^[22]

Drilling Decline Has Forced Oilfield Service Companies to Lower Rates and Layoff Employees

For drilling and exploration companies, the cost of producing oil has declined substantially since the beginning of 2009. While lower steel and diesel prices have contributed to declining drilling costs, the most significant factor has been the reduced demand for drilling equipment.^[23] In response to declining demand for drilling equipment, the rates oilfield service companies charge have fallen 30% on average.^[24] Companies like Schlumberger N.V. (SLB) and Halliburton Company (HAL) have laid off employees and reduced their capital expenditures budgets. Although oilfield service companies have lowered their rates, only about half of U.S. rigs are operating.^[25]

Schlumberger N.V. (SLB), Baker Hughes (BHI), and Halliburton Company (HAL) combined have cut about 10,000 jobs already since January 2009.^[26] Although oil prices have risen 35% since the start of May, and the number of rigs in the U.S. rose in June 2009, the number of rigs operating in the U.S. is down by more than a 1,000 from a year ago.^[27] As a result of lower energy demand, many oilfield service companies have begun cutting costs by reducing the size of their operation.^[28]

Production Companies Sell Debt in 2009 to Fund Drilling as International Rig Count Rises

Although rig counts in July 2009 are less than half of their levels a year earlier, U.S. rig counts have increased 5% in July 2009 since hitting a low in June 2009. There is more need for rigs because oil producers have the potential of increasing their revenue from oil prices that rose 25% during June and July.^[29] On the other hand, natural gas rigs have remained relatively flat in 2009. Many oil producers have financed additional drilling operations by issuing debt, selling shares, or selling assets.^[30] While increased rig counts have the potential of benefiting oilfield service companies, higher oil inventories are capable of reducing oil prices.^[31]

Drilling activity has increased outside the U.S. as well. Russia, Mexico, Norway and China all experienced double-digit growth in drilling in the second quarter 2009.^[32] Additionally, long-term deepwater drilling has also been increasing internationally.^[33] Growth in drilling activities internationally has the potential of increasing sales for companies that operate internationally like Halliburton Company (HAL) and Schlumberger N.V. (SLB).^[34]

Oil Prices, Supply, and Demand

On April 22, 2009 the Energy Information Association reported that crude inventories had reached 361.1 million barrels.^[35] At this level, oil stocks are 14.3% above their 2008 level and are 1 million barrels short of their highest level since 1990.^[36] In addition to the global recession beginning in 2007, high inventory levels are partially responsible for low 2009 crude prices. In order to reduce inventory levels in order to improve crude prices, many oil and gas producers reduced their crude oil production during the first four months of 2009.^[37] Although the crude inventories and crude oil production vary from region to region, the overall decline in crude production has the potential to hurt the revenues of oil service companies that provide crude producers with equipment.^[38]

According to several analysts, the demand for oil-field services and oil rigs has the potential to drop farther than analysts or oil service companies expected during the first three months of January.^[39] The decline in the oil services sector is a result of the decline in oil prices beginning in 2008 and overall lower consumption levels of energy.^[40] The number of active oil and natural-gas rigs fell 47% between September 2008 to March 2009.^[41] Additionally, Schlumberger N.V. (SLB) reported that several of its clients have tried to negotiate current contract prices lower.^[42]

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^[43]. 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^[44]; 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^[45] 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%)^[46], 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 uncertainty surrounding the 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. The recession of 08 and 09 is only a temporary setback. The new American president has made clear his support for renewable energy,^[47] and oil prices are expected to steadily recover. In emerging markets like China and India, the drive for economic growth supersedes environmental concerns, but growing popular and legislative support for renewables in these regions threatens oil's long-term dominance. China has announced its intention to increase nuclear energy production in its country 455% by 2020, and 1677% by 2030.^[48] 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.

Notes

1. ↑ Pioneer Drilling Company Rig Fleet List
2. ↑ Grey Wolf, Inc. Summary
3. ↑ Nabors Industries Ltd Summary
4. ↑ Patterson UTI Summary
5. ↑ Helmerich & Payne Rig Fleet
6. ↑
7. ↑ Rowan Companies Land Rig Fleet
8. ↑ Parker Drilling Fleet
9. ↑ http://www.cpeo.org/techtree/ttdescript/seisim.htm
10. ↑ 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"
11. ↑ WSJ: Schlumberger's Profit Slides as Drilling Drops, August 2009
12. ↑ WSJ: Halliburton's Global Net Boosts Hope of Rebound, August 2009
13. ↑ WSJ: Halliburton's Global Net Boosts Hope of Rebound, August 2009
14. ↑ WSJ: Schlumberger's Profit Slides as Drilling Drops, August 2009
15. ↑ WSJ: Halliburton's Global Net Boosts Hope of Rebound, August 2009
16. ↑ WSJ: Halliburton's Global Net Boosts Hope of Rebound, August 2009
17. ↑ Seekingalpha.com: Forget About Natural Gas, Oil Field Services Sector Shows More Promise, September 2009
18. ↑ Seekingalpha.com: Forget About Natural Gas, Oil Field Services Sector Shows More Promise, September 2009
19. ↑ Seekingalpha.com: Forget About Natural Gas, Oil Field Services Sector Shows More Promise, September 2009
20. ↑ Seekingalpha.com: Forget About Natural Gas, Oil Field Services Sector Shows More Promise, September 2009
21. ↑ Seekingalpha.com: Forget About Natural Gas, Oil Field Services Sector Shows More Promise, September 2009
22. ↑ Seekingalpha.com: Forget About Natural Gas, Oil Field Services Sector Shows More Promise, September 2009
23. ↑ WSJ: Lower Costs Give Oil Firms Breathing Room, May 2009
24. ↑ WSJ: Lower Costs Give Oil Firms Breathing Room, May 2009
25. ↑ WSJ: Lower Costs Give Oil Firms Breathing Room, May 2009
26. ↑ Associated Press: Big oilfield services companies cut more jobs, June 2009
27. ↑ Associated Press: Big oilfield services companies cut more jobs, June 2009
28. ↑ Associated Press: Big oilfield services companies cut more jobs, June 2009
29. ↑ WSJ.com: Drill Bits: Rig Count Picks Up Again. Why?, July 2009
30. ↑ WSJ.com: Drill Bits: Rig Count Picks Up Again. Why?, July 2009
31. ↑ WSJ.com: Drill Bits: Rig Count Picks Up Again. Why?, July 2009
32. ↑ WSJ.com:Halliburton's Global Net Boosts Hope of Rebound, July 2009
33. ↑ WSJ.com:Halliburton's Global Net Boosts Hope of Rebound, July 2009
34. ↑ WSJ.com:Halliburton's Global Net Boosts Hope of Rebound, July 2009
35. ↑ Seeking Alpha: Oil Inventories Close to Multi-Year Highs, April 2009
36. ↑ Seeking Alpha: Oil Inventories Close to Multi-Year Highs, April 2009
37. ↑ Seeking Alpha: Oil Inventories Close to Multi-Year Highs, April 2009
38. ↑ Seeking Alpha: Oil Inventories Close to Multi-Year Highs, April 2009
39. ↑ Yahoo! Finance: Sector Snap Oil Services Falls, March 2009
40. ↑ WSJ.com: Patience Seen as a Virtue in Oil Services, March 2009
41. ↑ WSJ.com: Patience Seen as a Virtue in Oil Services, March 2009
42. ↑ WSJ.com: Patience Seen as a Virtue in Oil Services, March 2009
43. ↑ Q4 2007 SLB Earnings Transcript, Page 3
44. ↑ "Maersk plans major drilling fleet expansion", February 1st, 2008
45. ↑ "National Oilwell Varco Q4 2007 Earnings Call Transcript", Page 2, February 6th, 2008
46. ↑ "The Global Deepwater Play: A Historical and Geological Perspective 27 Years After First Discovery" by Henry S. Pettingill
47. ↑ Barack Obama - New Energy for America
48. ↑ World Nuclear Association - Nuclear Power in China