Alliances in Oilfield Services a Win-Win for Operators and Contractors?

ALLIANCES IN OILFIELD SERVICES A WIN-WIN FOR OPERATORS AND CONTRACTORS?

By Odd Arne Sjåtil, Philip Whittaker, and Luigi Chiolini

rotracted weakness and volatili- the challenges of integration and of deliv- Pty in commodity prices have taken a ering a credible and distinctive value punishing toll on oil and gas companies. In proposition. response, these companies have focused heavily on increasing efficiency and reducing costs. The current wave of A New Wave of Alliances, JVs, alliance activity—including alliances, joint and Mergers ventures ( JVs), and M&A—among oilfield The current downturn in the oil and gas services and equipment (OFSE) companies, industry is worse than most companies and which is spawning an array of promising analysts had envisaged. This challenging new offerings, could prove to be a critical industry environment has had a substantial enabler of these efforts. And it could make impact on oil and gas companies, many of a meaningful difference to the business which have made substantial cutbacks in prospects of OFSE companies, which are capital spending and head count. also under considerable pressure to cut costs and boost revenues. Amid the industry’s challenges, however, there are reasons for encouragement. Successful outcomes for both operators These include the improvements in effi- and contractors are by no means guaran- ciency that the industry has already teed, however. In addition to their poten- achieved and continues to pursue. Driven tial benefits, these alliances present risks by the quest for greater efficiency and to oil and gas companies. These include lower costs, the industry is experiencing the risk posed by the growing market sweeping changes across its entire land- share captured by these alliances, which scape: increasingly innovative solutions, gives participating OFSE companies growing standardization, and surging considerable pricing power. OFSE players creativity in the development of new cost- in these alliances also face risks, including saving technologies.

For more on this topic, go to bcgperspectives.com In parallel, there has been a new emergence subsea umbilicals, risers, and flow- and acceleration of alliance activity, includ- lines (SURF) installers. Examples ing JVs and M&A, among OFSE companies include the merger between FMC as they rethink their business models and Technologies and Technip and the try to improve the attractiveness of their of- collaborations between OneSubsea and ferings in response to this environment. Subsea 7; GE Oil & Gas and Sapura- (See Exhibit 1.) The first such combinations Kencana; Saipem and Aker Solutions; encountered skepticism among other OFSE and GE Oil & Gas and McDermott. players. But increasing numbers of OFSE companies have formed alliances of their •• Process engineering firms joining own as these combinations appear to be forces with installation contractors. demonstrating real value and gaining accep- Examples include Subsea 7’s alliance tance among oil and gas firms. with KBR, Petrofac, and McDermott; and the JV between EMAS and Chiyoda. Most of these combinations fall into three categories (see Exhibit 2): We believe that five forces support further alliance, JV, and merger activity in this •• Oilfield services providers expanding environment: their offerings. Examples include Schlumberger’s acquisition of Cameron; •• The desire among oil and gas companies Baker Hughes’s alliance with CGGVeri- for engineering solutions that structural- tas; and, most recently, GE Oil & Gas’s ly lower costs, reduce lead time, and acquisition of Baker Hughes. Even the improve the reliability of delivery. failed merger between Halliburton and Baker Hughes, although motivated •• The perceived need among oil and gas mainly by its potential operating and companies for business model evolution financial synergies, could be viewed as and a step change in operational an example of this type of combination. efficiency. Oil and gas companies also want to be able to reduce interface costs •• Subsea production system (SPS) between or among multiple contractors manufacturers teaming up with and hold one contractor responsible.

Exhibit 1 | Alliance, Joint Venture, and Merger Activity, 2012–2017

Brent crude spot price (FOB) ($ per barrel) 150 Cameron/Schlumberger

CGG/Fugro CGG/Baker Hughes Aker Solutions/ GE Oil & Gas/ Baker Hughes 125 SapuraKenkana

Technip/FMC (Forsys Subsea) 100 Petrofac/McDermott Amec/Foster Wheeler GE Oil & Gas/NOV Schlumberger/ GE Oil & Gas/ Subsea 7/OneSubsea Lufkin Industries Helix/OneSubsea/Schlumberger 75 Anton Oilﬁeld Services Subsea 7/KBR Trinidad Drilling/Halliburton Technip/FMC Patterson- UTI/Seventy Seven Siemens/Dresser-Rand Aker Solutions/ABB 50 Saipem/Chiyoda/Xodus EMAS/Chiyoda Halliburton/Baker Hughes (failed to close) Aker Solutions/ 25 Schlumberger/Cameron Det Norske GE Oil & Gas/McDermott GE Oil & Gas/ Aker Solutions/Saipem Baker Hughes 0 2012 2013 2014 2015 2016 2017 Deal announcement date — Joint venture or alliance — Acquisition Sources: IHS Connect; Mergermarket; U.S. Energy Information Administration; BCG analysis. Note: Activity highlighted in the exhibit is non-exhaustive. FOB = free on board; NOV = National Oilwell Varco.

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Exhibit 2 | Three Main Types of Alliance Have Emerged

OFS SPS SURF ENGINEERING PROVIDERS MANUFACTURERS INSTALLERS COMPANIES Baker Hughes Baker CGGVeritas Schlumberger (One Subsea) Solutions Aker FMC Technologies GE Oil & Gas Cameron One Subsea EMAS Helix McDermott Saipem SapuraKencana Subsea 7 Technip Chiyoda KBR Petrofac Baker Hughes OFS PROVIDERS CGGVeritas Schlumberger (One Subsea) Aker Solutions SPS FMC Technologies MANUFACTURERS GE Oil & Gas Cameron One Subsea EMAS Helix McDermott SURF INSTALLERS Saipem SapuraKencana Subsea 7 Technip Chiyoda ENGINEERING COMPANIES KBR Petrofac

Oilfield services providers SPS manufacturers teaming Process engineering firms joining expanding their offerings up with SURF installers forces with installation contractors

Source: BCG analysis. Note: The alliances highlighted are illustrative. OFS = oilfield services; SPS = subsea production systems; SURF = subsea umbilicals, risers, and flowlines.

•• The opportunity for OFSE players to ing power within the industry, may encour- secure inexpensive access to valuable age additional alliances in an effort to assets and capabilities. Some OFSE broaden the number of contractors offer- companies are in financial distress; this ing certain solutions. presents opportunities for others to gain access to assets (of contractors) and proprietary know-how (of product and Opportunities and Risks for Oil service companies) at attractive rates. and Gas Companies OFSE alliances offer oil and gas companies •• The desire among OFSE companies to the potential for sizable cost cuts and secure revenues by engaging oil compa- gains in efficiency. This holds especially nies in the very early phases (that is, for the development of offshore resources. the concept and front-end engineering Making these projects more cost-efficient and design [FEED] stages) of projects. demands considerable engineering fire- Securing early engagement could allow power, and some of the biggest players in- OFSE companies to lock in later-stage terested in this arena—including Saipem, asset and product revenues. Technip, Aker Solutions, and Subsea 7— are aggressively pursuing this, having al- •• Concerns among OFSE players about ready formed alliances to further boost being left behind competitively by their scale and expand competencies. Such other companies that team up and efforts could ultimately transform the com- define new delivery and contracting petitive dynamics of the offshore and sub- models. sea markets.

Additionally, oil and gas companies, con- Through the delivery of innovative pack- cerned about the potential effects of OFSE aged solutions, OFSE alliances could also alliance activity on competition and pric- help oil and gas companies substantially

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reduce their interface costs, risks, and co- •• Challenges meeting government ordination requirements. In addition, OFSE procurement rules. Suppliers’ bundled providers could offer solutions that help oil offers could make it difficult for oil and and gas companies reduce their startup gas companies to adhere to government time to “first oil” and improve oil recovery procurement guidelines, particularly with efforts in brownfield basins. regard to local-content requirements. International oil companies may need to Moreover, these alliances could develop support national oil companies and local new technologies that otherwise might not governments in the design of efficient have been conceived. These technologies contract terms and requirements. could prove valuable in enhancing reservoir recovery rates or lowering project costs. To maximize their chances of realizing the value these new entities could offer while In addition to their potential benefits, how- mitigating the risks, oil and gas companies ever, OFSE alliances pose risks to oil and will likely have to reconsider their current gas companies: procurement approach, engaging early in the design process and with a view toward •• The potential for higher prices. The a longer-term partnership. concentration of key capabilities in fewer OFSE companies could lead to greater pricing power for these players, Keys to Success for OFSE especially when the oil cycle improves. Companies For example, the four largest alliances To position an OFSE alliance optimally and that integrate SPS and SURF capabili- maximize its chances of success, partici- ties—Technip/FMC Technologies, pants must make critical decisions about Subsea 7/Cameron, Saipem/Aker the alliance’s design. They must ask them- Solutions, and GE Oil & Gas/McDer- selves the following questions: mott—accounted for a large majority of the total market spending in these •• What type of agreement between or segments over the past decade. Acceler- among parties should we adopt—a ated consolidation could give these memorandum of understanding, a JV companies even greater pricing power. contract, or something else? It could also force other OFSE players to “go big” if they want to compete, •• How strongly—measured by the leading to further consolidation. number of people dedicated specifically to the alliance, for example—should we •• The possibility that contractors will commit to the alliance? compete to lock in proprietary standards. This would force oil and gas •• What is the ideal size and scope of the companies to manage the risk of being alliance? Is the alliance focused on the advised on technical solutions by core business or adjacencies? suppliers with conflicts of interest. These companies will have to deter- •• What is the nature of the offering? Is it mine how much technical depth they a joint integrated offering that has an should keep in-house and what level of associated delivery model or simply a control they should seek over the combined commercial offer? supply chain. •• How should we assign responsibility for •• Fewer options to mix and match tendering and technical development suppliers across categories. The costs? Should costs be shared? reduction in the number of suppliers will be exacerbated by continued •• What is our strategy for profit sharing? attrition among these companies due to Is the strategy aligned with the com- the sector’s ongoing financial distress. mercial interests of the alliance?

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•• What are appropriate incentive mecha- focused on winning the $10 million nisms? Do we have them in place? FEED contract or the $100 million installation work?) Examples include Answers to these questions will vary consid- lump-sum, risk-sharing, and accelerated- erably, given the wide range of development schedule models. trajectories that these deals can take. In some cases, an alliance is a first step toward •• Early engagement of, and collabora- a merger or acquisition (“engagement be- tion with, clients. Alliances need to give fore marriage”), as was the alliance between clients input on concept design as well FMC Technologies and Technip that as the design of delivery and service spawned Forsys Subsea. An alliance can also models. Oil and gas companies will be be a trial move, one that is inspired by com- entrusting these alliances with tasks that mercial needs but ultimately lacks a real they would have performed on their technical and operational value proposition. own in the past; the challenges for the alliance will include determining how to It is worth noting that alliances and JVs strike a balance between the indepen- have materialized in previous cycles, dent thinking necessary for effective though most have not had a lasting and FEED and the desire to lock in business. material impact on the oil and gas industry. History also tells us that, in many cases, •• Real commitment and genuine soft alliances ( JVs and partnerships, not alignment between or among the M&A, obviously) tend to fall apart when oil parties involved in the alliance. prices rebound and companies feel strong Securing these will force participants to enough to pursue strategies unilaterally. reach agreement on several questions: How can we best align businesses and Assuming a JV or an alliance is intended as cultures that have different emphases a long-term venture, we believe that there (for example, sales versus utilization, or are four key preconditions for its success: speed versus quality) over different timeframes (for example, FEED this •• The ability to articulate and deliver a year and installation in two years)? strong customer value proposition. How can we persuade top talent to This proposition must be compelling to commit to the team? How can we align the customer on multiple fronts, such as incentives for sales and marketing quality, speed of delivery, and in-service teams? How can we achieve the genu- support. OFSE players should be able to ine alignment necessary to overcome document actual cost savings that are complex operational and cultural driven by, for example, reductions in challenges related to the integration vessel days, lead time, crew and project and comanagement of assets, products, team size, and material and equipment services, and projects—and demon- costs. OFSE companies should also strate that alignment to operators? create customized communications that convey their value proposition to the various stakeholders of the operator il prices now stand substantially organization, including asset owners Oabove their lows of early 2016 but and personnel from operations and are still roughly half what they were before technical functions. they began their extended slide in mid- 2014. As a result, oil and gas companies •• New and appropriate contracting as well as OFSE players continue to face models. These models need to reflect considerable ongoing financial pressure. the entity’s updated value proposition OFSE alliance activity could prove an im- and business model. Mechanisms must portant part of the answer for both types be in place that balance very different of company. value propositions over the course of the project life cycle. (Is the venture

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About the Authors Odd Arne Sjåtil is a partner and managing director in the Oslo office of The Boston Consulting Group and a core member of the firm’s Energy practice, with a focus on upstream oil and gas. He has worked with operators, oilfield services companies, investors, and governments on a range of topics across the E&P value chain, including several assignments focused on operational improvement. You may contact him by email at [email protected].

Philip Whittaker is a director in BCG’s London office and a core member of the Energy practice, special- izing in upstream oil and gas, oilfield services, and energy engineering. He has worked with operators, national oil companies, and service companies in more than 25 countries on a range of strategic and operational issues. You may contact him by email at [email protected].

Luigi Chiolini is a principal in the firm’s Milan office and a core member of the Energy practice. He has worked with oilfield services providers and engineering, procurement, and construction companies on strategy, organization, and operational improvement projects in Europe, Asia, the Middle East, and North America. You may contact him by email at [email protected].

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