Potential of downhole gravity gradiometry for reservoir management

Applied downhole, this geophysical tool—already established in surface applications—could provide deeper depth of investigation than traditional nuclear measurements.

Robert Workman, Chairman, Petroleum Equipment Suppliers Association  

Growing up among the oil fields in West Texas, I came to know an unwritten hierarchy of the global oil value chain.

The unquestioned masters of oil were the Western international oil companies (IOCs). They had the cash, technology, experience and people to develop virtually any field they desired the world over. In the 1960s, they had full access to 85% of the world’s known reserves. Nearly all of the remaining reserves at the time, 14%, were controlled by the Soviet Union, which made those reserves politically unreachable.

Below the IOCs were service and supply companies—my family’s service company was among the mix. While several major technological innovations had been developed by the service and supply sector, much of the technological advancement of the time was done by IOCs. Service companies were, in effect, workers and a manufacturing base.

Below the service and supply companies were the reserve owners. Outside the US, these were the national oil companies (NOCs). They had vast reserves of resources, but lacked the finances, management, expertise and technology to reach the oil. For a cut of the produced reserves, the IOCs would develop their fields.

This hierarchy began to unravel in the 1980s and 1990s. With the bust of the late 1980s and a glut of world oil supply, the IOCs looked to save development costs wherever they could. The IOCs, to a great extent, ceded major technological development to the service and supply companies. That allowed service companies to prosper and profit from their innovations, which included the top drive, horizontal drilling, shale fracs, advancements in seismic, and much more.

The NOCs gained huge amounts of cash over the years and, more importantly, knowledge of their reserves and expertise on how to produce them. They began to discontinue produced reserve sharing contracts, and eventually many NOCs shut out IOCs altogether. Today, NOCs control 73% of the world’s reserves and IOCs control only 7%. Of the top 15 reserve holders around the world, only one is an IOC: ExxonMobil, ranked 14th. As the largest IOC, ExxonMobil has but one-fifteenth the reserves of the largest NOC, Saudi Aramco.

Several NOCs now had the technology and expertise to rival the IOCs and looked to invest outside their own borders. Companies like Petronas, Statoil and the Chinese NOCs basically became NOCs moonlighting as IOCs around the world. The NOCs have the advantage because they do not have to answer to shareholders. Their goal is only to secure more resources and more long-term financial security for their homelands.

Further mimicking their IOC counterparts, some NOCs are pursuing vertical integration, seeking profit at every stop in the oil and gas value chain. If the recent past is any indicator, full vertical integration will be extremely difficult, particularly with American assets. CNOOC’s bid for Unocal caused a nationalistic stir in the US Congress, and they ended up losing the bid to Chevron. But to me, Washington is sending a signal that NOCs buying major US companies may be difficult. Perhaps sensing that, Saudi Aramco has said that its goal is to have 50% vertical integration.

What is clear, though, is that the historic relationship model in the global oil value chain has changed drastically, and I think permanently. As the NOCs continue to wield their power and hold onto the rights for their resources, the major integrated service companies now find that their stature and role in the industry have grown. In some cases, NOCs now prefer to contract development of their fields to integrated service companies. At the same time, the new IOC role seems to mirror that of an integrated service company—the NOCs are contracting IOC project management skills for a fee.

If this trend continues, IOCs and some service companies may well begin to regard each other as competitors. Corporate strategy is already being affected, as one of the drivers behind the acquisition of BJ Services by Baker Hughes is to fill its pressure pumping gap. This allows Baker to compete with Halliburton, Weatherford and Schlumberger for integrated project management contracts, which are becoming the preferred method of doing business for NOCs that are looking to simplify their operations by dealing with one provider.

The IOCs are not alone in feeling the effects of the NOC rise in influence. The oil and gas equipment manufacturing segment has largely been able to sit on the sidelines and watch the changes take place. It’s been business as usual with the exception of adding several NOCs to their lists of strategic accounts. The game changer for equipment providers came with Petrobras and the rise of its offshore pre-salt fields.

The Brazilian government is aiming for economic growth, jobs and domestic industry development. Their extensive new rig-building program will be accompanied by strong Brazilian content requirements, in some cases reaching 50%.

This is the beginning of a revolution in the way the service and supply sector operates. It is a safe bet that other countries able to set similar terms will do so. Driven as much by the need to put people to work and build local economies as they are by the desire for profits and oil, other countries will begin to put their own local content requirements into contracts and production sharing agreements. This means sweeping changes for service and supply companies in everything from our global supply chains to talent management programs. To remain competitive, companies will need to accelerate development of their in-country manufacturing bases, create relationships with new partners and begin developing local populations into trained workers.

The NOCs have driven a major shakeup in the hierarchy, relationship structure and roles in the oil and gas industry. It will be a positive change over the long haul. Several NOCs have proven themselves to be exceptional players in the industry. They’re just as technologically savvy and driven to produce as are Western companies. Our industry needs as many of the world’s best minds tackling the energy supply issue as possible, no matter what company they work for. The fact is that there’s more than enough work and challenge for all of us, and we all need to continue to work together to fulfill the world’s energy needs.