Unsung Workhorses of the Oil Industry

Unsung workhorses of the oil industry

Oilfield Services Companies

KPMG Global Energy Institute

KPMG International

kpmg.com/energy Contents

1 Executive summary

2 Introduction The critical role of 3 the oilfield services providers

Regional markets 11 focus

21 Biographies

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Unsung workhorses of the oil industry 1 Executive summary

Over time, oil companies have service companies are responding increasingly become asset portfolio by downsizing. owners, more at arm’s length from the However, if oil companies just see execution of operations and support oilfield services companies as a services needed to perform these. commodity and keep a vendor at Oilfield services companies have arm’s length, they will not be getting established themselves as the heavy an oilfield services company’s most lifters of the oil and gas industry (or, thoughtful application of its knowledge as the Economist put it, “Unsung to a specific project. We believe that the workhorses” or “Masters” of the oil operators will become more dependent industry — depending on your point of on services companies, as they did in view — by leading both the delivery of the 1990s during the oil price slump, operations and the innovation space. for technologies solutions to extract oil more cheaply. The key technical The critical support they offer challenge will be to optimize technology to operations and their handle integration to reduce costs. on technological solutions have enabled national oil companies and Out of mutual necessity, the current low independents to manage much more oil price environment may accelerate complex projects than they would have the trend to new operating models, otherwise, and the IOCs over time have leading oil services companies and also become more dependent on oilfield oilfield companies into new partnerships services companies and increasingly through which risk can be shared and followed an outsourcing model. project delivery optimised on a longer term life-of-field basis. As oilfield services companies grow into this space, they typically handle more The trend within the sector towards risk. The distinction between the two more integrated services to operators Dr. Valérie Marcel sides of the industry remains, although will lead to service sector consolidation, Associate Fellow, there are a few examples of hybrid as the larger and more dynamic services Chatham House operating models. companies continue to build capabilities and competencies over a wider range The whole industry is facing significant Alan Kennedy of activities. This in turn will make challenges resulting from the low oil UK Oilfield Services Leader, them better placed to support new price environment. E&P companies KPMG in the UK partnerships and new operating models have been pushing the supply chain to with IOCs, NOC and E&P independents aggressively lower costs which in turn Zoe Thompson that can address cost issues in the is impacting margins. This is hitting the US Oilfield Services Leader, industry. service sector by reducing capacity KPMG in the US utilization and lowering rates, to which

Introduction

Historically, the world’s biggest oil low oil price — these companies, from producers closely guarded their role as US giants Schlumberger, Halliburton, operator of their own fields — convinced Weatherford and Transocean to major they alone could deliver the engineering international players such as Technip, necessary to extract their oil on time Wood, Aker and Petrofac, continue and on budget. Increasingly, however, to offer technological solutions over recent decades those producers for operations. have been ceding that role — opting in As oilfield services companies grow many cases to manage their assets at into this space, they handle more risk. arm’s length, and allowing the world’s The current low oil price environment increasingly sophisticated oilfield may accelerate that trend, leading them services companies to deliver cost- and oil company operators into new efficient production and, crucially, the partnerships through which risk can be oil-field innovation that Big Oil has long shared and project delivery optimized. assumed it alone could deliver. The speed and manner in which this has occurred This thought leadership piece has varies somewhat by geographic market. also carried out unique research of the service company sector in various The critical support service companies regions, to uncover the level of technical offer to operations and their handle on sophistication of the indigenous service technological solutions have enabled companies and the potential for local national oil companies, integrated value-added-content — an issue of great majors and independents to manage importance to governments hopeful of much more complex operations than developing a high-tech service industry in they would have otherwise. Despite their country. The results of this regional today’s sharp retrenchment and analysis appear in the back of this report. consolidation among the world’s service companies — driven by the stubbornly

The critical role of the oilfield services providers

Oilfield services companies provide projects which then become an the products and services necessary accepted industry service and way to construct, complete and produce oil of operating. Their specialization and and gas wells. Companies range from repeat use of services allow them Most NOCs would love giant Schlumberger, whose divisions to achieve economies of scale on provide nine out of 10 products and technology development — something to see these (big service services needed to explore, develop oil companies cannot do to the same company) guys more and produce an oil and gas basin, to a degree. single, service company like Geolog, because they do everything specializing in surface data logging Integration in one contract. for international and offshore drilling The industrial evolution of the service projects. sector is also characterized by Waleed Al Hashash What makes this diverse group a integration of services. Companies unique actor in the petroleum sector strive to offer more services across Former Deputy Managing is its relationship to oil company the value chain. Schlumberger has the Director at KPC, Chairman operators. A manager from a leading widest provision of services along the of Aref Energy and CEO of French oilfield services company whole value chain, but competitors explained that oilfield services have similar strategies and this is, for Rubban Logistics Kuwait companies are in the first row of a example, a driver of the BakerHughes- project’s pyramid of services and their Halliburton tie up. function is to select and integrate In the NOC market, it has been driven technologies into the project delivery. by the customer’s preference for The growth of the oilfield services ‘single company’ and ‘single contact’ sector is very much a story of solutions. These drivers are well innovation and finding solutions to explained by Waleed Al Hashash, a technological and cost challenges faced former Deputy Managing Director at by operators. “It is a solutions-driven KPC, Chairman of Aref Energy and CEO industry,” explains Alan Kennedy of of Rubban Logistics Kuwait: “Most KPMG. Companies grow by developing NOCs would love to see these (big proprietary technologies and know-how service company) guys more because that can be applied across particular they do everything in one contract. And

Spears 5% and 15% Associates 25% 2010 2015 2020

5 percent of a major service In 2015 the number In 2020 it company’s sales were was 15 percent will be 25 percent integrated services

this is something good for somebody 25 percent. The industry is moving who is tied up with a long chain of local toward integrated project management government tender procedures. So you handled by service companies and talk to someone like Schlumberger and this model favours the major service they can bring you your breakfast to companies. the derrick, as well as huge equipment US onshore may be less likely to follow under contract. The Schlumberger this path to integration because the US philosophy is propagating while small supply chain is a well-oiled machine, companies push to be able to offer according to Richard Spears. Shale more services.” wells in Turkey, for example, may cost Integration has also been driven US$20 million, while the same well by downturns in the industry and in the Eagle Ford costs US$6 million the need to reduce costs through thanks to the available and competitive economies of scale. In the current supply chain. This difference illustrates low oil price environment, integration the potential downside to the industry is being pushed through mergers from integration, as it threatens to and acquisitions. Schlumberger, reduce the very competition that for instance, acquired Cameron lowers costs and stimulates innovation International last August, bringing with and research. it more products and services that are required through the whole life of Outsourcing: A driver for the the field. Cameron’s expertise lies in service industry surface equipment, rig equipment and subsea equipment. Much as the oil Until the 1960s, the oil majors handled majors integrated into the downstream the multiple facets of operations to offset lower profits in the upstream in-house and they conducted in-depth when crude prices fell, oilfield services research into drilling, completion and companies look to be present in production technologies. In the 1980s, different activities in the field life cycle. these were then licensed to the oilfield There has been a big shift services companies. Functions such in the philosophy of how According to Spears and Associates, as drilling yielded low margins and in 2010, 5 percent of a major service diverted the attention of operators to operate in the last 2 to 3 company’s sales were integrated and they increasingly outsourced services. In 2015 the number was them to specialized companies with decades. 15 percent and in 2020 it will be

a greater ability to drive efficiency. The consequence of They encouraged the establishment of outsourcing technology companies to handle these services, development such as drilling, reservoir engineering, Innovation has segmented procurement, construction, laying Services that were initially low value down pipes, supporting ongoing grew more sophisticated as oil prices the industry between production and maintenance. Since fell in the early 1990s and operators service companies focused that era, however, oil companies have required technological innovations to not maintained the same level of develop oil more cheaply and access on developing technology in-house expertise in technology new geology. In this cost-cutting era, and carrying out execution research and development. oil companies decreased their R&D expenditure, while service companies and oil companies National oil companies, such as ramped up investment. This led to Kuwait Oil Company (KOC) and integrating multiple breakthroughs in 3D seismology Saudi Aramco, also outsourced these and directional drilling. technologies and managing functions and have focused their resources on overseeing operations. Today, some oilfield services overall risk. Waleed Al Hashash explained, companies spend more on R&D than “They have guys on the ground just oil companies as a share of total making sure the drilling companies are revenues. The service companies have doing their job. Coordinating. Giving incentives to do so: they can effectively the orders. But the real operations sell their technology to multiple on the ground are done by private customers. Innovation has segmented (service) companies. There has been the industry between service a big shift in the philosophy of how companies focused on developing to operate in the last two to three technology and carrying out execution decades.” The NOCs are focusing on and oil companies integrating multiple the interpretative work, which involves technologies and managing overall risk. deciding where to drill and how. They are supported in these decisions by Risk management international service companies but Oil companies take on financial risk the final decision rests with the NOCs. and are ultimately responsible for the As Al Hashash puts it, “They would not outcome of projects. They manage say, ‘Ok here is a lump sum and a piece relations with the host government of land. Operate it and give us 50,000 and communities. And in addition to barrels a day.’ The final say, the full political and above-ground risks, oil picture, is still in the mind of KOC. KOC company operators decide where and calls the shots.” how to explore (based on geophysical While the final decision on drilling data provided by an oilfield services rests with the operator, it is clear that company and sometimes upon the transfer of much of the execution their advice). In this sense, the oil responsibilities to service companies companies’ technological skills are has meant some operators have less largely interpretative. of a granular knowledge of their A challenge for operators today lies geology. They are more dependent The oil companies’ in the depletion of conventional, on external capabilities and experts, low-cost reserves. They face technological skills are particularly when tackling new significantly increased risks when geological challenges. largely interpretative.

confronting frontier oil and gas or Services division, which offers development choices during tertiary petroleum risk service contracts. recovery. This is because there are only Petrofac estimated some 2,400 The service company very imperfect analogues on which to small and medium-sized fields could base decisions in frontier petroleum be suitable targets for risk service does not accept huge activities — and with uncertainty contracts. In this model, oil service uncertainties or expose its the risk is greater.1 A manager from companies take up-front capital risks in a French oilfield services company exchange for a financial upside linked shareholder’s capital to explained that major oil companies to project performance, but do not these uncertainties. need ever greater technical capabilities, book reserves or production. This is as projects grow more complex an interesting model because it builds and costly. They are responsible for in the incentives for performance and selecting and integrating technologies. lessens the burden on the national oil “And their challenge is to optimize company or host government regulator and operate the project in its entirety. to carefully monitor performance. In In order to manage the project integrity the current low-price environment, they must put in place qualification and which brings particular pressures on validation procedures for all services mid-size independent E&P companies, and vendors.” we may see some large service companies move towards using their Pete Nolan, previously with BP and balance sheet and taking on some now an adviser to a private exploration production risk from less well financed company, explained how oilfield customers. services companies and oil companies approach and take responsibility for risk differently. “The primary difference Partnerships for is the scale of risk and how that risk is managing risk underwritten. A private oil company The complexity of projects and the competes when risks (uncertainty and ability of companies active in the oil capital exposed to this uncertainty) are sector vary widely. Naturally, the best very high and it shows its willingness marriage is between an operator to put very large amounts of its capable of managing risk, with a strong shareholder capital at risk to achieve process focus and technical ability on The best marriage is greater value. The service company the one hand, and a service company between an operator competes by promising greater that is equally capable on the other. But value to the oil company through its in an industry where small independent capable of managing risk, investment in technical research and companies have proliferated and with a strong process focus acceptance of performance incentives national oil companies have secured (and penalties). The service company the majority of proved reserves, the and technical ability on the does not accept huge uncertainties operators of projects are not always one hand, and a service or expose its shareholders’ capital to sufficiently experienced to handle these uncertainties.” company that is equally all technological decisions during But there are hybrid cases emerging, operations. In practice, oil companies capable on the other. such as Petrofac’s Integrated Energy have been able to rely increasingly on

1. Peter Nolan & Mark Thurber, in Victor, Hults and Thurber (2012), Oil and Governance, State-owned Enterprises and the World Energy Supply, Cambridge.

oil field service companies to share the lion’s share of liabilities as the some of the burden of technological operator. Transocean, which owned decisions and risk management. and operated the Deepwater Horizon rig, and Halliburton, which supplied the A good match in skills and abilities Some oilfield service cement intended to secure the well between the operator and the service and prevent leaks, argued with BP over companies wanting to company is key to the successful the extent of their responsibility. A outcome of the project. A manager respond to the needs of deal reached in May 2015 saw BP give from a leading French oilfield services up its claims against Transocean and customers “may step in company commented that a company Halliburton for their role in the disaster the size of Tullow does not have to do things that they are and the service companies drop their the same in-house resources as counter suits. Both service companies not accustomed to do or ExxonMobil. These companies work said they hoped the settlement would differently and their relationship particularly expert at. strengthen their working relationships with service companies is also quite with BP, an important issue for them at different. “Tullow will give the oil a time when their revenues have been Jean-Matthieu Castellani, service companies a greater level of under pressure from low oil prices.2 Vice President responsibility in the project.” It will not The broader fallout for the industry be as involved in detailed technical Development and is a greater awareness of operator decisions or oversee as closely their vulnerabilities related to accidents Communication at SBC work. “But that said, their project will and environmental disasters, but no be less complex than ExxonMobil’s clearly discernible move (as of yet at and they will have made sure that they least) to share responsibilities between selected the right service companies.” operator and service provider. Jean-Matthieu Castellani, former head of the Total account for Schlumberger, In countries where policies are put warned of a risk because some in place to secure a role for the oilfield services companies wanting indigenous service sector, there to respond to the needs of customers is a risk that NOC operators are “may step in to do things that they are not working with companies that not accustomed to do or particularly complement their abilities. Zeyad expert at. It is important to differentiate Al-Oudah, from the Kuwaiti oil service between service companies who have company AREF Energy, felt many of real capabilities to deliver integrated the local service companies had “very services and those who do not.” low exposure to international standards Very low exposure — especially in risk assessment and Positive outcomes are increasingly to international risk management.” However, the risk a function of the competence is mitigated because these companies standards — especially in of the service provider and yet, largely operate in joint ventures with in a partnership without shared risk assessment and risk global oilfield services companies accountability, incentives for the companies. In Iran, the local service management. service company to perform are limited companies have been required to to preserving the firm’s reputation. operate solo with limited access to In the assessment of responsibility Zeyad Al-Oudah, international equipment and exposure for the Macondo disaster, BP bore AREF Energy, Kuwait

2. Financial Times, 21 May 2015.

to international best practices, and so are “nimble and entrepreneurial.” And through necessity have built greater some will say that innovation requires local expertise than is available in other an entrepreneurial and unstructured If you ask them how they non-Western oilfields. search for solutions to technological challenges… and perhaps a willingness For independent oil companies over plan to approach and to be less conventional and assume reliance on smaller service companies more risk. The burden is then on the measure the risk related to presents risks. Processes are required oil company operator to work more to minimize the risk of adverse events foreign corrupt practices in diligently to manage risk throughout and these may not be the forte of oil the chain of services. a country where they are service companies. As Zoe Thompson, set to operate, they do not KPMG in the US explained, “Chevron, Risks in certain locations may be BP and other majors have a process increasing as: operations are handled have a standardized way of for decision-making — who approves by small independents and national assessing and mitigating what and when.” The largest service operators less expert at managing companies do too. But many of the risks; international oil companies that risk that they can apply mid-size oilfield services companies, rely on service companies to deliver to that case. especially the smaller ones, do not services for increasingly complex share this process focus. “If you ask projects; and operations increasingly them how they plan to approach and go into deeper waters where the Zoe Thompson measure the risk related to foreign environmental consequences of an US Oilfield Services Leader corrupt practices in a country where accident are dire. they are set to operate, for instance, There is a huge potential to explore they do not have a standardized way new types of partnerships between of assessing and mitigating that risk service companies and operators, that they can apply to that case. They which can be designed to lower reinvent the method each time.” On costs, improve project delivery and the flip side, these smaller companies

reduce operational or other risks. They Wood Mackenzie estimates that may range from greater information US$1.5 trillion of investment does exchange, improved coordination not break even at US$50/bbl.3 E&P or distributed liability to sharing of companies have been pushing the Operators will come back financial risks and rewards. Partnership supply chain to reduce margins and terms must be designed to offset any lower costs. This impacts the service to the service companies, competence gaps of each partner, sector through reduced capacity as they did in the 1990s taking into account, for example, the utilization and lower rates, especially in lower ability of some operators to the US where the investment pullback during the oil price slump, assess and manage risks. is most pronounced. Spears and for technology solutions to Associates estimated the market to be Addressing industry cost US$454 billion in 2014, but in 2015 it fell extract oil more cheaply. challenges to US$332 billion and is estimated to fall further to US$294 billion in 2016. The service sector is facing significant challenges resulting from the low oil But the operators will come back to the price environment. When comparing service companies, as they did in the capital investments plans for the 1990s during the oil price slump, for following two years in Q4 2014 and technology solutions to extract oil more Q4 2015, Wood Mackenzie saw a cheaply. The key technical challenge will decline of 28 percent, amounting to be to optimize technology integration a US$286 billion investment hole. to reduce costs.

3. Insight, Cost deflation outlook: upstream sector responds to low oil prices, 8 September 2015.

The ability of the service industry company for execution. A more to respond will depend on its cooperative relationship would lead continued investment in research and operators and service companies to Some companies will development and, very importantly, work together to optimize the planning its people. Slack demand for services process. Operators could share stand out by investing has led to layoffs, which raises the their aspirations for specific fields, through the downturn in challenge of a talent gap when schedules and timelines, and reservoir demand rises again. Investments in information. KPMG believes that on their workforce and by research follow the same pattern. But a typical onshore, unconventional maintaining a focus on some companies will stand out by project the complexities associated investing through the downturn in their with an non-integrated supply technology. workforce and by maintaining a focus chain drive up costs much higher on technology — either in-house or than necessary. by acquiring weaker companies with Oil companies can share risks and strong technology potential. rewards with service companies. By Another key factor in the ability changing partnership terms to engage of service companies to meet the service provider as a partner expectations of technology holding equity in a project, operators optimization and cost control will be will create new incentives for service the willingness of operators to forge companies to apply their knowledge a new business model based on to the benefit of the project and to cooperation. As long as oil companies mitigate risks. Such new partnership see oilfield services companies as a models are a natural evolution for commodity and keep vendors at arm’s well-established operator NOCs and Sharing financial risks and length, they will not be getting the service companies, which are already rewards would solidify this service company’s most thoughtful acting within a more collaborative application of its knowledge to a framework, sharing vital information partnership and ensure the specific project. about projects. Sharing financial risks and rewards would solidify this service provider mobilizes Oil companies can share more partnership and ensure the service information with oilfield services its best resources for the mobilizes its best resources for the companies and involve them more in project, works to mitigate risks and fills project, works to mitigate the pre-planning process. Currently, any gaps left by the NOC operator. risks... the operator would plan independently and then select the appropriate service

Regional markets focus

In many petroleum-producing countries, the US, by far the largest in terms of an indigenous service sector has grown market size and number of companies. over the years, expanding services Small, medium and large OSCs drove offered. This development is important key innovations in unconventional gas for the countries involved because, as and oil extraction. Second, we examine the North Sea and American methods China, where investments in R&D are demonstrate, industrial clusters around very high. A unique feature in China the upstream oil and gas projects is that these service companies are create jobs and drive innovation. It subsidiaries of NOCs, which gives these is also important to understand the companies a different set of incentives. level of sophistication and ability of In Russia, the market is relatively these indigenous service providers diversified, with a number of NOCs because, as we saw, operators are and vertically integrated companies, increasingly relying on the oilfield which have some in house services and services companies sector to carry out employ global and local oilfield services operations. companies. Next, we look at Africa, where NOCs are largely non-operators Our report reviews the oilfield services with relatively low capability. They companies sector developing in various depend largely on foreign oil companies parts of the world. We focus first on

to explore for reserves and to operate on the horizon amid the explosive rise their fields and these companies hire of what some in the industry called and manage the international service “Cowboyistan” — Texas’ Permian and The smaller companies companies. After producing oil and gas Eagle Ford basins and the Bakken in for almost 60 years, one would expect North Dakota. These three plays drove are particularly vulnerable; local independent producers and service half of the global production growth as the bigger companies companies to be well established. since 2008 and combined were the But only since the 2010 local content seventh-largest liquids producer cut prices to maintain or legislation, discussed below, have there in the world. With oil hovering at improve market share, been major changes in this area. US$100/bbl and 1,931 active rigs4, the future for US oil and gas production We then turn to the Middle East, which the smaller players simply looked promising — and the industry is the most important market for the responded with a proliferation of cannot compete. international OSCs. The reserves smaller, specialized oilfield services there are large and low cost, and this companies to meet strong demand.5 has enabled local oilfield services companies to grow their business. But A little more than a year later, crude is the NOC operators are facing increasing less than US$40/bbl and the rig count technical challenges. Mexico is similar has dropped by over 60 percent to a to the Middle East in that the NOC has five-year low of 709.6 The oil price been the customer of the OSCs, but change and corresponding drop in with the particularity that the country drilling activity has had a particular is opening up to foreign investment. In impact on these domestic-focused the Caribbean, Trinidad and Tobago is oilfield services companies. Less an interesting example of a developing diversified geographically or with the country that has worked to develop services they provide, they have fewer its domestic supply chains in order response alternatives than their larger to maximize in-country value-added peers. Despite cutting costs and laying content. And finally, in the North Sea, off personnel, contracting demand a sophisticated and well-established for services has inevitably impacted service sector has nurtured the growth financial returns for the oilfield services of some of the world’s largest oilfield companies sector.7 While the bigger services companies. companies cut prices to maintain or improve market share, the smaller US market players simply cannot compete. Many have been forced into bankruptcy; In the case of the US oilfield services the lucky ones have become targets companies, there is a segment of for larger companies with stronger activity that is US-focused or indeed Many have been forced balance sheets. state-focused, as well as another class into bankruptcy; the lucky of players that has an international The industry has seen that well- ones have become targets scope. In this section we will examine capitalized companies are looking more carefully the former. for acquisitions to fill gaps identified for larger companies with in their product or service offerings. The United States, long a net importer As is common in cyclical downturns, stronger balance sheets. of crude, saw energy independence

4. http://marketrealist.com/2015/07/highest-us-rig-count-rise-year-whats-impact/ 5. http://newsok.com/article/5397907 6. http://phx.corporate-ir.net/phoenix.zhtml?c=79687&p=irol-rigcountsoverview 7. Standard & Poor “Negative Outlooks Prevail For US Oilfield Services Companies Amid The Commodity Price Slump”, June 8, 2015

the first rounds of M&A focused These companies spend a lot on R&D: on diversification, as a means of PetroChina stands out as the top helping to endure the difficult industry spender in absolute terms on R&D environment. Geographic diversification among all oil and gas companies. The Chinese NOC model may be out of reach for some of these However, Richard Spears, a long-time smaller players, but Duff & Phelps industry observer, has commented does not incentivize Securities sees companies assessing that the Chinese NOC model does innovation because as diversification outside of their current not incentivize innovation because as oilfield services companies market subsidiaries of the NOCs they are not subsidiaries of the NOCs activities. “Certain oilfield services spurred by competition to outperform they are not spurred by companies equipment manufacturing their peers. and fabrication business are targeting competition to outperform A degree of opening in the services acquisitions that would provide sector could be required to significantly their peers. them access to the general industrial move the trajectory of unconventional and downstream petrochemical gas development in China. Some industries. Market diversification often Chinese firms are already venturing seeks to apply the company’s core abroad to gain access to new competencies, such as metallurgy technology solutions. The wellhead and engineering, in industries that systems expert Plexus Holdings, for may be countercyclical to their instance, entered into a partnership with OFS business activities.”8 Small to China Oilfield Services, majority owned mid-size oilfield services companies are by the NOC CNOOC, and will work with also showing interest in stock merger Red Sea Technologies and Yantai Jereh transactions, which draw less on their Oilfield Services to explore commercial liquidity. The question for many is when opportunities for shallow water subsea the timing will be right to take advantage and crossover wellhead production of the vulnerabilities of the weaker systems in China. companies. Will crude prices and rig counts continue to slide, therefore providing even better bargains? South East Asia Specialist service providers exist in China Southeast Asia within an ecosystem of domestic service providers. They The Chinese service sector is among provide field labor, supply chain and Russian oil companies the most developed. The market is still logistics services for remote locations, centrally planned to a large degree, have also demonstrated warehousing and distribution services. with high barriers to international The domestic agenda is very much in an interest in establishing company participation. Indigenous favor of protecting and nurturing local company growth has been driven by joint ventures with service providers. This is done through this protected market and strong ties to contractual stipulations for local content. foreign players in order the Chinese NOCs. Indeed many of the service companies are subsidiaries of Over the years, this approach has diluted to get access to foreign the NOCs. the impact of the large international technologies.

8. Oil and Gas Financial Journal, 8 June 2015; available at: http://www.ogfj.com/articles/print/volume-12/issue-6/ features/what-lies-ahead-in-ofs-sector.html

service companies and restricted their Russia contribution to specific services which The Russian oilfield services market might not be available in the domestic has grown rapidly over the last decade. scene. Conversely, the maturity of the Whilst oil prices were high, Drilling remains the leading oilfield domestic service provider has evolved service, comprising around 65 percent the ecosystem, enabled with the provision of more complex of all oilfield services. But Russian services and equipment. by local content rules, companies have extended their scope of flourished in supporting However, the evolution of domestic work to include advanced well stimulation service companies in South East Asia and enhanced oil recovery techniques. field service activity but has not equipped local players with This growth was triggered by a general the depth or ability to innovate in the the questions remain as to activity boom resulting from new way that their integrated international projects. Major Russian oil and gas whether they will be able counterparts have done over the years. companies disposed of their oilfield R&D largely remains the purview of the to survive the continuously services divisions as non-core assets NOC. This is particularly notable when which were not as competitive as the low prices. considering secondary and tertiary independent Russian service companies. recovery techniques that help extend The Russian market diversified, with the economic life of aging reservoirs indigenous and foreign oilfield services in the South East Asia region at a time companies of various sizes offering when exploration activity has been services. Sanctions are changing the curtailed. picture by limiting the access of large Finally, the domestic OFS companies foreign oilfield services companies to the are fundamentally built to serve an Russian market. Local oilfield services existing master and therefore their companies have an open field to provide fate is tied to a set of relationships. a full scope of services, if they prove They are not particularly well equipped capable of meeting the requirements to compete for the work that does of operators. For now, there is a gap remain. Whilst oil prices were high, the left by the large foreign players and ecosystem, enabled by local content Russian oil majors have begun to revive rules, flourished in supporting field their previously outsourced service service activity but the questions divisions. Russian oil companies have remain as to whether they will be able to also demonstrated an interest in survive the continuously low prices. The establishing joint ventures with foreign international OFS companies survive players, in order to get access to foreign through major restructuring of their technologies, offering in exchange a prime cost base. share of local market and projects.

Africa foreign firms doing as much financial engineering as possible to meet the Africa had been a high, growth area criteria, but not investing as much on for international oilfield services people and infrastructure on the ground. companies, but low oil prices may hit Africa had been a They continue to apply a fly-in/fly-out the sector hard there. This is particularly methodology that worked for them high, growth area true for companies servicing the frontier over the 50-plus years of production developments, ultra-deep offshore, for international OFS in Nigeria. and other high-cost reserves, where companies, but low oil operators are cutting back spending and In East Africa, the prospects of large cancelling or delaying projects. oil and gas developments in Uganda, prices may hit the sector Kenya, Tanzania and Mozambique The domestic or regional oilfield hard there. elevate the issues of local content. services sector is limited but has been Governments are contemplating growing in some countries like Nigeria, legislation that could impose far supported by the 2010 Nigeria local higher local content requirements content act which requires international than the present low commodity price companies to partner with Nigerian environment can support. These issues companies for services. AOS Orwell, remain outstanding. for instance, is a Nigerian company with more than 200 man-years of field experience in wireline pipe Middle East recovery. Ladol and Jagal are other Producers in the G.C.C. and Iraq are local companies offering a free zone a key market for the largest oilfield and integrated oil and gas services in services companies, especially as Nigeria — including rig repairs and dry those NOCs have come to depend dock facilities where 100 percent of increasingly on service companies for Governments are the work is carried out in Nigeria. New operations over the past two to three contemplating legislation Nigerian companies are also providing decades. New entrants from China, marine support vessels of many Korea and Canada are gaining market that could impose far different sizes, and more and more pipe share in a region historically dominated higher local content coating services are available in-country, by the established international players. with the Chinese and others investing in requirements than the However, some trends are emerging new pipe plants. which point to a greater involvement present low commodity The term “Nigerian Content” however of indigenous companies. First, local price environment can is still in flux in the oilfield services private oilfield services companies are companies space, with some increasingly active in the Gulf. While support.

such companies had traditionally Some of these companies are listed and been simple agents, offering foreign operate throughout the region. companies the label of ‘local content’ This trend will no doubt be helped by in exchange for an equity stake, new You get respect in the Saudi Aramco’s decision in December companies are being created in Oman, 2015 to increase the share of local Gulf because you’re local Kuwait and Saudi Arabia, with a view service companies in projects. The to taking an active role in the business. and you’re putting in the In-Kingdom Total Value Add (IKTVA) Waleed Al Hashash, who has worked in programme seeks to double the money, learning the know this sector and for the Kuwait national percentage of locally manufactured oil company, explained these local how and chasing tenders energy-related goods and services to private companies now put up equity 70 percent by 2021 and to raise the like anybody else. to form joint ventures with foreign OFS export of Saudi-made energy goods and companies. “You get respect in the Gulf services to 30 percent over the same because you’re local and you’re putting time frame. in the money, learning the know how and chasing tenders like anybody else. In Iran, the local oilfield services You’re not sitting there like an agent, companies sector has prospered just a messenger, going back and forth.” since the mid-2000s as US and then

international sanctions prevented many and Pemex has required vendors to cut international oilfield services companies costs by up to 25 percent. But Alexander from entering the market. There are Braune from KPMG in Mexico sees hundreds of Iranian companies active in upside for domestic companies. They will National preference the energy sector. need to adapt their business models and corporate cultures in order to compete is unlikely to increase Aliakbar Vahidi AleAgha estimates that and position themselves under a new most of these are in the chemical, at Pemex, where the value proposition framework. “They engineering and manufacturing sectors, have the advantage of local knowledge focus since the energy four to five companies are “small oil and connections” and that makes them companies, carrying out a number of reform is increasingly attractive partners, especially for the functions,” and “20 to 30 are service shallow, on-shore and EOR areas. on performance and the companies with very particular upstream oil expertise,” including offshore and So far, round one has awarded bottom line. onshore drilling, logging, wireline shallow and on-shore acreage. Two and cementing. But the big service of the consortia which were awarded companies are needed. Cementing exploration and production blocks services, for instance, are limited by included private Mexican oil companies. restrictions on imports of chemicals Alexander Braune anticipates similar which only a few big names produce. consortia to emerge in the oilfield Safety standards are lower too and much services companies sector between of the equipment used is out of date large foreign and local companies. While and corroded by time. “When sanctions specialist upstream services have yet end, international service companies to emerge in Mexico, the country’s will return. But they will not monopolize sophisticated industrial base will enable the market.” it to grow in the EPC (engineering, procurement and construction) sector. Mexico Before the 2013 sweeping reforms of Carribean the energy sector, Pemex relied heavily Trinidad and Tobago has a 105-year- on foreign service companies. Even at old petroleum history and its service equal capacity, Pemex is said to have sector is more sophisticated than favoured foreign companies — one many of its peers in the developing supplier of drill bits based in Mexico world. Especially since 2003, Trinidad said that Pemex “had never bought and Tobago has sought to maximize one.” National preference is unlikely to value added domestically and analyzed increase at Pemex, where the focus its upstream value chain to identify since the energy reform is increasingly activities offering the best potential on performance and the bottom line. In to add value and move the country to the low oil price environment, Mexican an innovation economy. Its domestic companies are taking a beating, like their service companies largely focus on counterparts north of the Gulf of Mexico, niche markets where they can compete

with larger foreign companies. Tucker built up in the North Sea has been Energy Services, for instance, began exported to other regions. For example, by offering cementing and cased hole a significant proportion of global subsea While specialist upstream wireline services in 1939, slickline developments are run and managed services in 1967, coiled tubing services from this region. services have yet to in 1978 and hydraulic fracturing in Norway in particular has a strong 2012. It now offers its services outside emerge in Mexico, the tradition of technological innovation, Trinidad. Owing to its small size, it could which has helped the industry tackle country’s sophisticated not compete with larger players on R&D more challenging subsea formations, expenditure for product development. industrial base will enable water depth and climates, and which Instead, it has opted for importing has made local technology companies it to grow in the EPC and adapting existing technology, and attractive acquisition targets for larger reserving their R&D for those areas in sector. groups with the international reach which pre-existing technology to match and distribution networks to exploit their service needs does not exist.9 The the sales opportunities from these company cited the need to overcome technologies. the perception of being “third world” in the highly competitive energy services The region is however a relatively industry as a key driver for innovation. high-cost province, which in the current oil price environment presents North Sea additional challenges for operators and service companies, as discoveries The North Sea market, both in the become smaller and field economics UK and Norway, is one of the most more marginal. The industry is trying developed in the world, with particular to react through more collaboration, expertise in deep water and hostile industry standardization and more offshore environments. It is home technological innovation. This may to many local indigenous service provide a blueprint for wider industry companies. Many of these, such cost initiatives and business models in as Wood Group, Aker, Technip and other territories. For example, with the Petrofac, have evolved over the past few maturing of the basin, managing end- decades from local bases to become of-life fields and decommissioning are major international players. Much of now becoming a real source of activity the technical capability and know how

9. Kieron Swift, Council for Competitiveness and Innovation, « Four Innovation Companies in Trinidad and Tobago », 2014.

within the region, which as experience R&D investments by the NOCs benefit in this area grows, may lead to service their service company subsidiaries. companies in this region becoming Government can also create an global decommissioning leaders as enabling environment through policy. This may provide a skills learned in the North Sea are again The US model illustrates the value of exported to other regions. blueprint for wider industry this approach to doing business and What the service sector creating businesses — its openness cost initiatives and to various scales of service companies business models in other means to these regional was instrumental in the development of markets its complex value chain. In Nigeria, local territories. content rules dating from 2010 were The service sector is an important instrumental in creating opportunities mechanism through which oil and gas for both local oil companies and producing countries can add value service companies. The Nigerian domestically to the extraction of finite Content Development and Monitoring resources. As smaller companies, Board (NCDMB), which oversees the indigenous firms tend to seek out and measures the growth of Nigerian smaller niches that may not meet the content in all oil and gas projects, investment threshold of the large, operations and transactions, estimates integrated OSCs. An advantage they that US$5 billion of new investments have is that their initial capital needs have been made by Nigerian service are relatively modest. International companies in the last four years and companies need large, expensive that tens of thousands of jobs have developments (like offshore pre-salt) to been created. The Ministry of Petroleum justify investment. Resources announced that local Governments sometimes support this content had grown generally from The service sector is an domestic industry through subsidies. 3 to 5 percent to a significant For instance, domestic companies stand 12 to 18 percent in 2014.10 important mechanism to gain from government investments In Norway, local content preferences through which oil and gas in R&D, as was the case in Norway did a great deal to facilitate the where the government nurtured producing countries can development of a strong services domestic innovation. This pattern may sector. But the successful outcome add value. be replicated in China now, where large

10. See: http://www.energylegalblog.com/archives/2015/02/10/6046#sthash.ZY0Ds7XH.dpuf

there was also attributable to the high of smart young graduates to work on national levels of education, engineering the project. and technical competence and From our survey of various producing alignment between government, state Ambitious local content regions, it appears that ambitious local oil companies and the service sector. content rules have an important effect rules have an important Similarly, a reason that sophisticated on the development of a local services services proliferated in Iran and not in effect on the development sector, but they are not without risks. places like Iraq and Libya (also under Where the domestic supply chain is of a local services sector, sanctions) is the high calibre of Iranian immature, local content requirements universities. Aliakbar Vahidi AleAgha was but they are not without can lead to the proliferation of passive a manager at the NIOC subsidiary PEDC agents or “5 percent companies” risks. and involved in upstream negotiations that free ride and increase costs for for Iran. He is now the managing international vendors. Where local director of Toseh Fan Avarihaye Hamyar companies do carry out the work there Mohandesi, which has developed what is also the real risk that a lower focus on is believed to be the first reservoir process and risk management lead to modeling software ever produced in the accidents and corruption. developing world by assembling a group

Dr. Valérie Marcel is an associate fellow at Chatham House, and leads the New Petroleum Producers Discussion Group. She is an expert on national oil companies and petroleum-sector governance, and has carried out extensive fieldwork in order to gain an understanding of the perspectives of producer countries. She is the author (with John V. Mitchell) of Oil Titans: National Oil Companies in the Middle East (Chatham House/Brookings, 2006). Her current research focuses on governance issues in emerging producers in sub-Saharan Africa, as well as in other regions. She is a member of KPMG’s advisory team for energy-sector governance. She also provides thought leadership for the Global Agenda Council on the Future of Oil and Gas at the World Economic Forum. Dr Marcel previously led energy research at Chatham House, and taught international relations at the Institut d’études politiques (Sciences Po), Paris, and at Cairo University.

Alan Kennedy is one of KPMG’s most experienced transaction services professionals, and since 2013 has been UK Lead Partner for Oilfield Services. He has responsibility for KPMG in the UK’s relationships with many of the major companies in the sector and many independent and private equity backed businesses. He has worked on over 100 oilfield transactions in several jurisdictions, including the UK, Norway, US, Middle East, Australia and Singapore.

Zoe Thompson is an upstream value chain specialist with more than 20 years experience in a broad range of organizational performance and change management areas including workforce improvement, corporate culture and competency assurance. She has formerly served as the E&P segment account lead for two IOCs. In that role she partnered with upstream client leadership to solve their strategic business problems through all aspects of consulting services, from management consulting to outsourcing, managing teams of over 100 people.

Interviews with Dr. Valerie Marcel Richard Spears, Managing Partner, Spears & Associates Aliakbar Vahidi AleAgha, General Managing Director at the Iranian service company Toseh Fan Avarihaye Hamyar Mohandesi and previously a senior executive at the National Iranian Oil Company, Iran Waleed Al Hashash, Independent advisor, former Deputy Managing Director at KPC, Chairman of Aref Energy and CEO of Rubban Logistics, Kuwait A manager from a leading French oil services company Pierre Bismuth, Senior Adviser, Schlumberger Business Consulting Zeyad Al-Oudah, AREF Energy, Kuwait (by email) Jean-Matthieu Castellani, former head of the Total account for Schlumberger Pete Nolan, Adviser to a private exploration company (previously with BP and Stanford PESD) (Interview with Mark Thurber, Associate Director of the Program on Energy and Sustainable Development (PESD) at Stanford University)

Alan Kennedy Dimeji Salaudeen Satya Ramamurthy UK Oilfield Services Leader Leader, Oil & Gas Leader, Strategy and sectors KPMG in the UK KPMG in Nigeria KPMG in Singapore [email protected] [email protected] [email protected] Zoe Thompson Anton Oussov Leornie Quek US Oilfield Services Leader Leader, Oil & Gas Partner KPMG in the US KPMG in Russia ASEAN Management [email protected] [email protected] Consulting KPMG in Indonesia Ruben Cruz Raymond Ng [email protected] Leader, Oil & Gas Leader, Oil & Gas KPMG in Mexico KPMG in China [email protected] [email protected] Michael McKerracher Mona Irene Larsen Leader, Oil & Gas Leader, Oil & Gas KPMG in Canada KPMG in Norway [email protected] [email protected] Anderson Dutra Gopal Balasubramaniam Leader, Oil & Gas Leader, Oil & Gas KPMG in Brazil KPMG in Qatar [email protected] [email protected] Jonathan Smith Eric Wesselman Leader, Oil & Gas Leader, Oil & Gas KPMG in Australia KPMG in Netherlands [email protected] [email protected]

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