Drilling through service pricing combat

After suffering from the brutal challenge between service companies by competitors’ system of lowering prices, fears began to emerge for monopolizing the market through lowering prices

Though the service companies do not have any hand in producing oil, they are still one of the most important elements of the industry. Their services are delivered through certain rules, usually laid down by the government of the country. Consequently, these services are offered after the government launches a bid round for every concession.

And here comes the dilemma, when the service companies are entitled to be in a tender they challenge, everyone by its own way, to be the winner. And that’s what has been happening lately, creating a closed war of prices in the service companies’ community.

Even though the service market could be controlled outwardly by the government rules, a company in the market could be the real regulator and adapt the role of ‘the puppeteer’.  It even controls the market not by being the only provider of this service, but the company that set the price of this service. Lately in our local market, we’ve been suffering from a similar condition that caused a dark haze like service companies like to call it. In order to get to the bottom of this issue we need first to understand the idea of monopoly as an economic expression; it exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it.

Although a service company could go so low in its prices to compete in the market but still other firms may find it hard.
“We could not compete,” said Weatherford, who didn’t find a logical explanation to the other competitor’s system of lowering prices close to nil. Weatherford as a major International Oil Field Service company had to deal with such case through lowering its prices too, but as they provide tools and technologies from countries like the United States so they can only go to a certain limit! In their eyes they see the other opponent may resort to acquiring the machines from the Far East like China, which will cost nothing compared to other countries. Accordingly, Weatherford will start building plants in the Far East and in El-Ein El-Sukhna that will provide the equipments to cover the high cost problem.

And to look at it, a major company is suffering from losing tenders due to the odd way of lowering the prices by its rival, and this makes you wonder about how the other small service companies are managing.

The puppeteer could be changed from a service to another and from condition to another, but mainly combined by the price issue. The puppeteer usually is the one that offers the lowest price; though it may affect the quality of the service, but companies that need these services may bow to the idea of low quality to take advantage of the low pricing.
“Service quality cannot be compromised, yet up till now there are companies that will jeopardize their operation for the sake of incremental price difference without considering the services or the product quality which could lead to substantial spending extremely exceeding the incremental price difference resulted from poor quality in services,” Halliburton told Egypt Oil and Gas.

After the recession, this kind of irregularity, which made lots of companies reduce their prices as a result of the decreased cost of the products worldwide, was expected. Nevertheless, companies like Weatherford could not lower the price of some of its products.
“We did lower our prices after the global market crisis, not all the products because of their high cost, especially the ones we import them from the US. But overall we reduced our prices,” Weatherford told Egypt Oil & Gas.

As for Halliburton, “pricing is a key tool to differentiate a product or service from those of the competition, since prices emit signals about product quality and exclusivity. Halliburton do realize that a pricing strategy should be long-term in nature, in that it should pave the way to take more products to market in the future”.
To look at it from both sides, we need to think about the reason behind the phenomenon of lowering prices, is it because of the global recession or just a way to expand their market share?

For Halliburton, when considering pricing decisions, their overall goal is to look ahead to stay a step ahead of the competition, laying out the scenarios. “If we do this, the competition will react a certain way. Nonetheless, if the competition doesn’t react that way, then we have to have another plan ready. We cannot afford to fall behind our competition.”

Moreover, when the government creates a company like the Egyptian Field Development Company (EFDC) that provides the same services through third parties without going through a tendering process, the dilemma will be increased. Thus, the credibility of the government ought to be examined if it’s the one who sets the rules in the first place, and then double face it!

This sheds the light on lacking the needed rules to control the market since the quality of the service is the most affected by the rules’ absence. For example, Halliburton sees, “there should be a quality standard evaluation for each service company in order to differentiate between each service company listed in the Egyptian market, which are plenty, according to service quality which should ultimately reflects on the pricing”.

While Weatherford suggests having a protocol, “we really need a protocol so as to control prices and the market”.
As for small companies, they will need to address the government to issue such protocol, which will lock the prices at a certain point that all will agree on it. It will give the owners of the concessions the freedom of choosing the service company on the basic of which will be more useful for the developing not on the basic of who offers lower price. The companies in the market could coordinate and discuss how they can work side to side without causing the market to fall. They have to take in mind that with this monopoly policy the market is heading to a weak point that will affect the small and the puppeteer!

The government itself should always be up with the issues that restrain the market from growing in the right path, through analyzing the market; one may find the foreign companies are more successful than the local. So, we could look more in the way they run their businesses and try to figure how we can benefit from their experience. Their success might be because of their functional use of technology, so we need to know what our own companies are missing.

All in All, people used to look at the dark side of the moon, especially that the relation within the industry became a known phenomenon, but we still need to look at the bright side too. The idea of having a local company standing side to side with a foreigner one in the market even if this company ignores the rules of its own government sometimes…but yes it makes you proud to know that your own local company is competing the other major companies in your own market!

By Sama Ezz El-Din


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