* Access to high-tech services a boon for state oil cos
* State oil cos, independents account for bulk of global
* Majors still seen bringing a lot of expertise
By Braden Reddall
Nov 13 Albert Einstein once wrote that he would
rather have been a plumber than a physicist because of the
independence it would allow him. Faced with the growing power of
big oilfield service firms - playfully derided as "plumbers" by
some in the industry - many oil men might now feel the same way.
Breakneck expansion across the energy business in the past
decade has seriously leveled the global playing field, leaving
the oil "majors" exposed to competition in areas where they once
One factor behind the shift is the emergence of the plumbers
as guns for hire by anyone who needs their world-beating skills.
The client lists of Schlumberger Ltd, Halliburton Co
and Baker Hughes Inc increasingly bulge with
state-backed national oil companies (NOCs) and ambitious
"independents" - as oil companies without refineries are known.
In the past, NOCs such as Brazil's Petrobras or
Petronas of Malaysia may have relied more on one of
the majors for their engineering expertise when developing an
oil field. Now, they can go straight to a services company
without having to offer equity in oil developments to outsiders.
Schlumberger, the clear global leader in services, says
national oil companies and independents account for
three-quarters of the industry's capital spending. Among
Schlumberger's top 30 clients, the share of 2010 revenue from
majors was down to about 20 percent from 33 percent in 2002,
while the NOC share had doubled to 32 percent.
The reversal of fortune is clear even in deepwater drilling,
or wells in 4,000 feet (1,200 m) of water or more. A review of
data on discoveries worldwide shows that, so far this year, only
six of the 38 finds were made by the likes of BP, Shell
or Eni, whereas majors made more than half the
26 discoveries in 2006, when deepwater drilling first took off.
The wider oil game has changed so much that even Exxon Mobil
Corp is left to sign simple fee-per-barrel deals, as it
did in Iraq, with no provision for payouts to rise in tandem
with oil prices, according to a report on the oil business from
London think-tank Chatham House.
"Companies may think such deals give them a 'foot in the
door'," the report said. "But the handle remains on the inside."
Exxon is now exiting its $50 billion Iraq project in favor
of a deal in autonomous Kurdistan to the north.
Seasoned oil executives are certainly quick to caution
against overstating the relative decline of traditional Big Oil.
Robert Herlin, the chief executive of Evolution Petroleum
Corp who was a board member at services company Boots
and Coots before it was bought by Halliburton, said services
firms had to tread carefully when stepping into the shoes of the
"You don't want to be competing with your customers," Herlin
said, adding that keeping up with new technologies took a lot of
time and capital. "The services business is a tough business,
because you're always at the tail end of the cycle."
Still, the shifting balance of power is significant. Andrew
Gould, who was Schlumberger's CEO for a decade before leaving
this year, sees risks for Western oil majors if their drilling
prowess is matched by the countries that have much of the oil.
Having crossed the services divide to be chairman of oil and
gas firm BG Group Plc, Gould warns that NOCs are
ambitious and quick to learn. He said some boast a technical
depth on par with the majors, which could even threaten Western
"Unless we refocus, we're in danger of handing our
technology lead irrevocably to the emerging petroleum nations,"
the UK-born executive said at the Chatham House report's launch
last month. "And given our continued reliance on fossil fuels
... I'm not sure that this is very wise."
For decades, anyone with oil ambitions felt they had little
choice but to court a major, going all the way back to the firm
that became Chevron Corp setting up the Arabian American
Oil Company: Saudi Aramco, now the world's top energy producer.
Would-be Aramcos today, or even those with less lofty goals,
can buy much of the technology directly from services companies.
Alan Kleier, a Chevron executive who spent seven years in
Angola, saw a dramatic change in how that country pushed for
local hiring as it built up expertise, and said many of his
staff gravitated to the NOC, Sonangol. But he believes majors
still bring a lot to table in terms of technological expertise.
"Do I think there's a day when they do it all themselves?"
he said of Sonangol. "They may work toward that, and the day may
come. But they're still probably years away."
In Brazil's case, Petrobras has built up so much experience
in its ranks that it is even trying to build a services industry
at home. "They see the size of their reserves and say 'We have
lots of time in front of us, we can do it'," Gould said.
So service firms fall over themselves to get close to NOCs.
Near Aramco headquarters in Dhahran, Baker Hughes just opened a
research center, while Schlumberger has been there since 2006.
Schlumberger towers over others in its geographic reach and
scale. After tripling in value in the past decade, it would rank
among the top 10 market-traded oil companies by value;
Schlumberger's market capitalization of $90 billion puts it
within range of BP and Total. By comparison, Exxon
grew by 162 percent in value in that time, and Shell 59 percent.
The share of the top three services companies in the S&P energy
index is now a tenth, up from 8.5 percent 10 years ago.
Many national oil companies have clear advantages, not least
the deep pockets of their state backers and an implicit home
In February, Petronas had Halliburton put a technical center
in Kuala Lumpur focused on shale gas and oil, indicating its own
ambitions in unconventional drilling. Petronas is also trying to
buy Canada's Progress Energy Resources.
Eric Gordon of Brown Advisory in Baltimore, which has about
one-eighth of its $29 billion in assets in energy, said all this
new competition for access to oil means contracts between
oil-rich countries and the majors will grow less favorable
"It's a concerning trend for anyone investing in the oil
majors," he said, noting they already have to spend far more to
get less because the "easy oil" is gone. "The capital intensity
continues to rise, yet their ability to generate profitability
relative to oil price movements has become less impressive."
TECHNOLOGY FOR ALL
Independents, in a further blow to big oil's dominance, have
led the way into crucial new developments such as North American
One such company is Ultra Petroleum Corp, whose CEO,
Mike Watford, began his career with Shell. Watford said the
rebalancing of research and development (R&D) spending over the
years to the services companies had been a clear benefit for
smaller players who could suddenly afford the latest technology.
"Now I've got access to it," he said at a recent conference.
"The service companies want less of a premium for it."
Ranking industry R&D as a share of sales, Chatham House put
service firms in the top six, then Petrobras and PetroChina
, and two independents: Anadarko and Noble
The cyclical churning faced by technology innovators has
been made clear for Halliburton and Baker Hughes this year.
Having spent heavily to build up hydraulic fracturing capacity,
a collapse in natural gas prices left the industry oversupplied.
For Schlumberger the relative impact of the gas glut was far
less given its greater global reach.
The power to maintain steady prices is vital for the
services companies, as Gould made clear at an industry
conference in Houston back in 2009. Schlumberger's customers
were grappling then with a dramatic drop in oil prices, and
calling for service rate cuts to help out, to which he quipped:
"When did the bill from your plumber last go down?"
(Reporting by Braden Reddall in San Francisco, Peg Mackey in
London, and David Gaffen in New York; Editing by Patricia Kranz
and Tim Dobbyn)