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.
These companies deal in a wide range of oilfield services, allowing them access to markets ranging from seismic imaging to deepwater oil exploration.
These companies build rigs and supply hardware for rig upgrades and oilfield operations.
These companies provide saltwater disposal and transportation services for Oil & Gas..
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.
These companies build onshore pipelines to transport oil and gas between cities, states, and countries.
These companies supply the tankers and service staff needed to get large quantities of oil and gas across the ocean.
Oilfield services companies provide the equipment and services used in the exploration for and extraction of oil and natural gas. Companies that provide oilfield services such as Blowout Preventer (BOP) Testing include K & K Energy Services, LLC and others.
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.
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. For example, Blowout Preventer Testing is generally done by contractors and not the drilling company.
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.
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) than rigs that must somehow be attached to the ocean floor.
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:
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:
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.
Strong international drilling activity as well as a rebound North America contributed to the rise in earnings for all of the largest oilfield service firms. Rising oil prices led to the rise in global drilling activity and also helped improve the margins of oilfield service firms as well. Some of the top earners in the final quarter of 2010 include:
Several CEOs of oilfield service firms provided positive outlooks for 2011. In particular, oil prices that fall in the $70 - $90 range have the potential of encouraging investment in exploration and production, which would require oilfield service equipment and technology. While the North Sea, West Africa, the Middle East, and Asia are identified as potentially lucrative areas in 2011, operations in Mexico and Russia are predicted to remain relatively weak early in 2011. In 2011, Andrew Gould of Schlumberger expects prices to remain relatively depressed due to the increases in supply from unconventional gas in the US and LNGs globally. Steady natural gas prices are likely to limit the demand for oilfield services by producers.
For oilfield service companies, Gould’s outlook illustrates the role technology has the potential of playing in the industry. Because less conventional sources of exploration and production rely on more advanced technology to extract the oil, oil field service companies that offer an array of advanced technology have the potential of benefiting from the rise in exploration and production investment. In the industry, technology for drilling has been developed in traditional research and development departments as well as through merger and acquisitions, including Schlumberger’s acquisition of Smith International in 2010.
For companies that rent offshore rigs, the temporary ban on drilling in the Gulf of Mexico has the potential of reducing revenues from the area for the remainder of 2010. The stock prices of rig contractors like ENSCO International (ESV), Transocean (RIG), and Noble Energy (NBL) have all dropped from April to July 2010 because they have all lost business in the second quarter of 2010 as a result of the moratorium. However, analysts are predicting that the full impact of the ban is likely to be felt after the initial six-month stoppage ends. Not only does it take time for rigs to obtain permits and run the necessary tests, but analysts expect rig costs to remain permanently higher due to potential taxes and safety regulations. As a result, the impact of the moratorium is likely to continue into the third and fourth quarters of 2010. For companies that have strong land service operations, the ban is unlikely to hurt earnings or stock price as much. Companies like Halliburton Company (HAL) and Baker Hughes (BHI) have benefited in the second quarter from higher oil and gas prices, which have led to a higher demand for drilling. Companies with large portions of earnings coming from onshore services have the potential of gaining a competitive edge in terms of future revenues and contract opportunities over their offshore competitors.
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. Haliburton and Weatherford reported similar earnings. 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. 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. However, North America produces primarily natural gas and has not experienced that same increases in drilling activity due to low natural gas prices. Drilling activity has the potential of remaining low as long as natural gas decline.
According to economists at Schlumberger, rig count and drilling activity in the second and third quarter of 2009 suggest oilfield drilling has the potential of recovering as soon as the fourth quarter of 2009. Latin America and Russia have the potential of experiencing the biggest recovery from 2008 in terms of rig count. A recovery in drilling activity means a larger need for the equipment, technology, and services that oilfield service companies provide. However, the economists also noted that growth in oilfield activity is likely to remain slow in 2010 and oil production has the potential of remaining well below its 2008 peak. As a result, spending by service providers is going to be about the same level or slightly up from 2009.
Obtaining a stable workforce also has the potential of effecting the industry in the long-run. According to Gould, the number of young recruits hired to replace older petroleum engineers has declined over the past 10 years. Hiring difficulty has the potential of stymieing Schlumberger's and the industry's ability to expand. As a possible remedy, more engineers are coming from schools located in China, India, and Indonesia.
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. 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. 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. 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.
In February 2010, executives at Schlumberger and Smith International announced a merger-agreement between the two companies. Out of the acquisition, Schlumberger hopes to improve the engineering and design parts of its operations. Schlumberger, which is the largest oilfield service provider in terms of revenue, hopes to combine its advanced measurement and steering equipment with Smith's engineered drilling systems. According to Schlumberger, the merger has the potential of generating incremental pretax synergies--after integration costs--of approximately $160 million in 2011 and approximately $320 million in 2012. In March 2010, Schlumberger acquired Geoservices for $1.07 billion. Geoservices, a French oilfield services company, specializes in mud logging technology, which is used to extract evidence of oil and natural gas from the drilling fluid as the well's total depth increases.
In particular, Oil & Gas Drilling & 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. Many of the small companies are cash strapped and unable to acquire additional lines of credit. The Baker Hughes and Schlumberger mergers illustrate two trends that have the potential of playing a significant role in future mergers. Adverse economic conditions and tighter credit markets in 2007, 2008, and 2009 have the potential of making smaller oilfield service companies more financially attractive to acquire. However, technology also has played a significant role in 2009 and 2010's acquisitions. The increased complexity of horizontal and multilateral drilling are making niche service companies strategically valuable to companies like Schlumberger and Baker Hughes. Through mergers and acquisitions, a large-cap oilfield service company is capable of bringing several complementary technologies under one provider. As a result, mergers have the potential of reducing drilling and operation costs.
Oil discovery had reached its peak around the year of 1960. Most of the of the largest oilfields had been discovered, and what have lefted are the smaller ones. Many of the larger oilfield have been in production for more than 40 years, and their depletion rate is increasing in a faster rate year after year. In order to meet the increasing globle oil demand, oil company will have to keep drilling in a faster rate from the smaller oilfields and from the more challengeing unconventional sources such as shale oil. The service intensity will have to increase because the depletion rate from those smaller oilfileds are much greater than the depletion rate of the larger ones. That is going to be a long term trend which a few of the big oil service company such as Schlumberger will be benefited from such higher intensity and technologicaly more challenging service environtment.
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. In response to declining demand for drilling equipment, the rates oilfield service companies charge have fallen 30% on average. 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.
Schlumberger N.V. (SLB), Baker Hughes (BHI), and Halliburton Company (HAL) combined have cut about 10,000 jobs already since January 2009. 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. As a result of lower energy demand, many oilfield service companies have begun cutting costs by reducing the size of their operation.
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. 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. While increased rig counts have the potential of benefiting oilfield service companies, higher oil inventories are capable of reducing oil prices.
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. Additionally, long-term deepwater drilling has also been increasing internationally. 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).
On April 22, 2009 the Energy Information Association reported that crude inventories had reached 361.1 million barrels. At this level, oil stocks are 14.3% above their 2008 level and are 1 million barrels short of their highest level since 1990. 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. 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.
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. 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. The number of active oil and natural-gas rigs fell 47% between September 2008 to March 2009. Additionally, Schlumberger N.V. (SLB) reported that several of its clients have tried to negotiate current contract prices lower.
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. 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. ,
The average drilling rig found anywhere in the world is about 25 years old; 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 for new and upgraded rigs.
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%), 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.
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.
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.
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, 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. Any decline in oil demand will lead to a decline in oil prices - and a decline in demand for oilfield services.
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.