Editorial comment

Vol. 232 No. 10

When Edwin Drake drilled the first commercial oil well in the US in 1859, his drilling contractor was a saltwater driller using a steam-powered cable-tool rig, and his service company consisted of a blacksmith named Billy Smith and Billy’s son. Over 152 years, the oilfield services segment has grown to be a major part of the global oil and gas industry.

The three leading service companies—Schlumberger, Halliburton and Baker Hughes—have a combined market capitalization of $133 billion. In recent years, the relationship between the operators and the service companies has undergone substantial changes.

R&D transfer. In the early decades of exploration, the oil companies developed proprietary technologies and kept the new techniques close to their vests to retain a competitive advantage. As the service companies became large entities, they began to fund their own R&D to provide improved products and services in a highly competitive market. When operators developed new technologies, they often licensed the innovations to the service companies. Among the technologies developed through such R&D commercialization partnerships is solid expandable pipe.

During the late 1990s, when there were multiple mergers between the large IOCs (Exxon-Mobil, Chevron-Texaco and BP-Arco-Amoco), they found it expedient to disband some of their R&D centers and transfer that task to the leading service companies. This short-term solution to cut costs and payroll has backfired in recent years: Major NOCs with indigenous financial strength can now circumvent the IOCs and work directly with service companies to gain access to the latest technologies. This strategy is evident in Brazil, where Petrobras has invited the major service companies to establish research facilities at its Cenpes R&D complex to help solve technical challenges associated with presalt fields. Under Brazil’s new production-sharing model, Petrobras has reserved the right to be the operator of all the presalt fields that have not been previously leased to IOCs.

M&A activity. Integrated services was a concept developed in the 1980s, but it didn’t take hold back then. Within the last year or so, each of the major service companies is making concerted efforts to become the single source for all oilfield services. For example, Baker Hughes acquired BJ Services to provide pressure pumping services. Schlumberger acquired Smith and M-I Swaco to fill gaps in its portfolio related to drill bits and fluids. Halliburton acquired Boots & Coots and, most recently, Multi-Chem in a similar strategic move.

Back to the future? In June, Shell announced a manufacturing partnership with China National Petroleum Corporation (CNPC) that has the potential to create another shift in the relationship between operator, drilling contractor and service company. Faced with the daunting task of drilling 30,000 wells worldwide in shale, coal-seam and tight gas wells in the coming decade, Shell has formed a manufacturing partnership with CNPC to develop automated drilling systems. Shell does not intend to license its technology to the service companies, and has circumvented the drilling contractors as well. As such, this move is a return to the past practice of retaining a technological edge within its own enterprise.

Peter Sharpe, Shell’s executive vice president for wells, acknowledged that, for other oilfield projects, the company will continue to utilize its present working arrangements with the service companies and drilling contractors. It remains to be seen whether the Shell-CNPC technology collaboration is a harbinger of the future or a one-off arrangement.