By Noha Yasser
Oil drillers have struck a “Gusher”! This is, however, a gusher they do not want, one of red ink signifying unprofitable budgets. The overproduction of crude oil, along with low price per barrel, has led to less demand for crude, resulting in loss of revenues for oil service companies. The question is, can service companies survive the severe fall in revenues, and still remain healthy enough to perform on future contracts?
Low Oil Prices Challenges the Sector
The global low crude prices have caused revenue loss for Oilfield Service Companies (OFSCs) from $454 billion in 2015 to $294 billion in 2016, down 35%, according to Spears and Associates, a research-based company providing consulting to the petroleum industry. To compensate for these losses, research and development sections’ expenditure has been cut, and thousands of workers were laid off. As a result, prices for equipment and services ascended. Due to that, many oilfield services providers were left poorly positioned in the market as they started turning into higher-cost, technically challenging applications sellers.
OFSCs were thus forced to cut their spending even further and stayed financially submerged. With low oil prices and weak crude demand, producers cut the cost of extraction, Steven Knabe, the Director of Halliburton Consulting stated in April 2016, according to IBM’s website. In doing so, they are now in a dire need of selecting “the right development strategy,” which is “a multibillion-dollar decision for a large oil and gas field,” said Knabe. In order to do so, service companies started “using high performance computing of the IBM Cloud, [though which] we can run very detailed simulation models and evaluate a wide range of field development options, which translates into better field development plans for our clients and a competitive advantage for our business,” Halliburton Consulting Director concluded.
From Survival Strategies to New Partnerships
Service companies are thus left to their own devices to continue supplying production infrastructure and capacity in the currently demanding environment. It is expected that this will allow them in the future to compete and grow when the market recovers. But until then, no joyful news is on the horizon. Industry experts predict further shrinkage. They emphasize that cost-cutting as a survival strategy for service companies will, by itself, not be enough for them to remain sufficiently robust to launch future projects successfully, wrote Stock Market Editor at CNBC, Bob Pisani, in an August 2016 article – Here Is How Companies Can Survive $40 Oil.
Oil industry analysts thus concur that seeking new alliances and business collaboration may provide some new opportunities. Mergers come into consideration. Pisani explained that service sector mergers may be a drastic step to take, but it is an increasingly likely one. There are dozens of small- and mid-size service companies such as Concho Resources, Cimarex Energy, Pioneer Natural Resources, and Whiting Petroleum that may adopt this path. But this is only one side of the story.
A merger strategy involves another level of a potential organization. As a UK-based analyst at KMPG, a global network of independent member firms offering audit, tax and advisory services, Alan Kennedy, and Zoe Thompson of KPMG in the US explained in a March 2016 report – Unsung Workhorses of the Oil Industry – Oilfield Services Companies, “future problems from the current weak market can be resolved by ending the practice of keeping oilfield service companies as contractors, and instead partnering with them.” This necessarily implies that OFSCs would need to transform accordingly to live up to their new role.
The Practice of Integrated Services
OFSCs are the workhorses of the oil industry involved in finding and extracting oil and gas. It is undoubtedly, “a solutions-driven industry,” as Kennedy at KPMG previously stated. They must therefore continually advance their portfolio in order to prosper.
In an article published by The Fuse, a news and analysis portal, in March 2016, Leslie Hayward stated that currently, there has been a growing demand for OFSCs to be capable of performing all aspects of hydrocarbon production with a marked boost from 5% of service companies’ sales in 2010, up to an expected amount of 25% at the end of the decade. Those that can respond to this challenge adequately have thus started transforming into the so called integrated or all-in-one entities, as Hayward noted. In the March 2016 report by KPMG, the authors further noted that service companies are now required to focus on the technological advances that would come as integrated into production services scheme on an on-going basis. As a result, oilfield services giants such as Schlumberger and Halliburton currently provide almost every service required to explore, develop, and produce from a reservoir.
Integration practices, no doubt, pose some challenges for the relationship between service companies on one side and oil and gas majors on the other, as well as in relation to service companies’ internal management structures. Primarily, major oil companies must have confidence that service firms can reliably deliver project design and engineering expertise, secure workers’ safety, and strive for a clean environment at the same time. In order to meet these requirements, an integrated Quality, Health, Safety, Environment (QHSE) management system of service companies comes as one of key aspects that can lead to a success story in collaboration with oil drillers and among service sector competitors.
QHSE scheme connects the services operator system to the driller and other sub-contractors. Nonetheless, responsibility for Health, Safety, and Environment (HSE) thus goes to the operator i.e. the rig contractor, whose well site managers are responsible for day-to-day activities. Yet, as service companies tend to take over these aspects of hydrocarbon industry, it is important for them to outline an efficient and effective management structure internally for these purposes.
Quality, Health, Safety, Environment
Halliburton is one of service companies that have adopted required health and safety mechanisms through internal structures. The company created a business model that incorporated all aspects of QHSE in one system – Halliburton Management System (HMS). Their mission – ‘Journey to Zero’ – was launched in 2013 with a bold vision to fully eliminate safety and environmental incidents on site.
“The foundation of this has been our leadership commitment, robust management system, and the competencies and commitment of people – all core elements of our Journey to Zero. It defines six elements that provide a roadmap for advancement. The elements remain consistent each year, while specific focus areas evolve annually. These elements include Leadership Commitment – a personal quality shared by Halliburton’s leaders; Halliburton Management System – a company policy; Continuous Improvement, Training and Competency; Communicate and Address Risks,” explained Halliburton’s HSE Quality Management, Mohamed Adel, in an interview with Egypt Oil&Gas (EOG) in August 2016.
In line with this strategy, “we will maintain our focus on safety, sustainability, and service quality,” because “working safely is something we simply cannot compromise; it is fundamental and must remain the bedrock of our company’s culture,” added Adel.
Waleed El-Ghamrawy, HSE Coordinator at Halliburton discussed in an interview with EOG how the company is progressing in efficiently implementing individual projects by following the Journey to Zero guidelines. Halliburton is protecting its operations from EHS negative impacts on the upstream oil and gas sector as a whole, securing its employees’ safety, and ameliorating negative environmental effects despite environmentally hazardous processes.
Thanks to the adopted techniques and structures, Halliburton’s HSE performance has continued to improve and its service quality has gradually enhanced even in increasingly complex and demanding projects, as the company’s representatives shared with EOG. This was achieved also because the company developed its internal set of guidelines in Environmental & Occupational Health and Safety schemes in accordance with Good International Industry Practice (GIIP).
Speaking about the environmental aspects, El-Ghamrawy said that Halliburton’s “Total Environmental Incident Rate (TEIR) was 10% lower in 2014 than in 2013, at 0.96 incidents per 200,000 working hours. This is the result of our increased focus on process adherence.”
The company is dedicated to constant reduction of greenhouse gas emissions across the value chain, which is guaranteed as Halliburton modifies the equipment it deploys according to environmental requirements. The use of diesel engines that meet the Tier 4 standard is critical. The standards set strict requirements for non-road diesel engines in order to lower productions of particulates, nitrogen compounds, and other pollutants by as much as 90%.
In this respect, Halliburton appears to be a unique OFSC, because it designs and manufactures its own equipment itself in order to ensure compliance with environmental obligations. “With increased numbers of production wells, operators and communities are finding new ways to reduce costs and environmental impact. Production waste management that includes the four R’s – reduce, re-use, recycle, and recover – are particularly effective“ in the case of Halliburton, El-Ghamrawy stated. In this way, the company has managed to reduce its waste production by 22%, decreased waste management costs by 36%, and reduced pad construction by re-using 92 cubic meters of drilling cuttings.
Furthermore, as Halliburton’s HSE Coordinator El-Ghamrawy added, “the company also applies all protection mechanisms for the health and safety of its employees across the production phases,” i.e. during the drilling, construction, and decommission. Halliburton supplies Personal Protective Equipments (PPE) to all its workers on site. El-Ghamrawy elaborated further saying that no employee of Halliburton works in an environment of noise above 85 decibels without hearing protection. All electrically charged equipments are marked with warning signs to prevent shock or electrocution incidents, and, in addition, all cables and equipment are checked for worn or exposed insulation.
El-Ghamrawy concluded that when hiring contractors, OFSCs should focus on contractual obligations for hazard management activities, meaning that safety procedures would need to be specified in and required by the signed contracts. It is only in this way that service firms can aspire for a role as an integrated professional oilfield services provider.
Prospects for Service Firms
Practices that Halliburton adopted show one possible way to approach difficult times in the global industry market.
The service firm modified its strategy towards an integrated service provider in order to offset its losses, which only in the fourth quarter of 2015 amounted to $667 million, as a company’s press release informed in January 2016.
Halliburton has also recently sold its engineering unit, Kellogg, Brown, and Root (KBR) due to lagging profits, aiming for more integrated solutions such as wellbore and stimulation isolation, cement squeezing operations, drill stem testing (DST), and tubing conveyed perforating (TCP) activities. Technological innovation also stood in the center of Halliburton’s services with advanced technology in tool design, materials, and delivery, and a portfolio of drillable, retrievable, and stimulation service tools.
As the role of oilfield service companies in improving oil fields changes, they are becoming the main co-operators of oil and gas fields in terms of creating more effective practices, enhancing productivity, and developing new ideas. Without having to depend on oil companies as such, OFSCs, despite falling oil prices, can develop mechanisms to sustain their business through successful integration practices, competitive alliances, and new partnerships with oil and gas producers.