Becareful of Outsourcing
- From: bear@xxxxx (Polar Bear)
- Date: Thu, 31 Jul 2008 00:22:33 GMT
Veware of outsourcing, eventually you hand over all your business to
others...SIA balls are already in IBM hands
http://www.ft.com/cms/s/0/a2499aa6-5d9b-11dd-8129-000077b07658.html?nclick_check=1
Nationals? champion: How the energy-rich rely on Schlumberger
By Carola Hoyos in London
Published: July 29 2008 19:43 | Last updated: July 29 2008 19:43
Andrew Gould is quietly becoming one of the most powerful men in the oil
industry, so much so that he feels compelled to reassure the world?s biggest
energy groups that he has no intention of making them redundant. ?We do not,
cannot and would not replace what oil companies do with things we can?t do,?
says the chief executive of Schlumberger, the world?s largest oil services
group, in a rare interview.
EDITOR?S CHOICE
Yet the list of things Schlumberger cannot do has shrunk so dramatically that
many national oil companies (NOCs) can now forgo the costly and politically
tricky step of forming partnerships with international oil companies to tap
their own oilfields. For the likes of ExxonMobil, BP and Royal Dutch Shell, that
means losing the most lucrative part of their business ? the part they have
relied on to achieve growth in production, revenue and reserves for much of
their existence.
Euan Baird, Mr Gould?s predecessor, liked to quip that when he joined
Schlumberger, on an assignment to Shell Brunei in the 1960s, the only service
Shell did not itself own was wireline logging ? measuring rocks by feeding
cables with sensors down oilfield boreholes. That shifted gradually over the
following decades, as low oil prices prompted Shell and others to shed their oil
services divisions, shutter their research labs and sever their ties with a
generation of engineers and geologists.
Schlumberger and others stepped into the void and since have been in a sense
democratising the industry, enabling NOCs and small independent operators to
chip away at the energy majors? market share. As crude prices rose to record
highs, that paid off for all involved. Now, the industry is entering its next
phase ? and one question is whether the oil services groups will be able to take
on the task of helping the oil majors extract crude from the world?s most
difficult deposits.
Upward energy
When an exploration executive at one big European oil company said at a recent
gathering that Schlumberger ?has sent us into an identity crisis and forced us
to question what it is we bring to the table?, none of the handful of industry
colleagues standing beside him dissented. An executive in the strategy group of
another European oil company warns that Schlumberger needs to be careful not to
let tensions escalate by neglecting its relationship with IOCs, even though they
are no longer its biggest clients (see chart).
In fact, Schlumberger?s biggest clients by revenue are independent oil companies
? which do not have refining and marketing divisions ? and its fastest growing
revenue stream comes from its second largest client group: the NOCs. Spending by
the group of 42 NOCs ? which include those in Russia, where Schlumberger has
doubled its workforce in the past two years ? has increased 3.5 times,
significantly faster than expenditure by the six biggest international energy
groups, which has almost doubled. ?Part of that is who can invest,? says Mr
Gould, adding: ?It is a sign also of the NOCs? evolution over the past four to
five years.?
NOCs fall broadly into two categories: those rich in resources and active mainly
at home, and those seeking to tap oil and gas abroad. The resource holders?
category is led by Saudi Aramco, which has the world?s biggest oil reserves
exclusively at its disposal. The ?seekers? are led by cash-rich Chinese
companies such as PetroChina, whose primary job it is to find enough oil to fuel
their country?s rapid economic growth, and the sophisticated duo of Brazil?s
Petrobras and Norway?s StatoilHydro, the closest in ability to international oil
companies. None of these, however, could do their jobs without Schlumberger or
other oil service companies such as Halliburton, its biggest competitor.
But Schlumberger, which is three times the size of Halliburton in market
capitalisation, has several advantages over its peers. First, 40 years ago the
company decided to create a workforce ? and eventually a management team ? that
represented the countries in which it did business. Schlumberger?s top 50
management positions are today held by people of 20 different nationalities.
Among those who report directly to Mr Gould ? a Briton ? are two Americans, two
executives from France, one Lebanese, one Moroccan and one Canadian. In
comparison, ExxonMobil?s four-man management team hails entirely from the US and
the only nations apart from the Netherlands and the UK represented on the
Anglo-Dutch Shell?s executive team ? one of the industry?s most international ?
are Switzerland and the US.
Schlumberger?s cosmopolitan approach has also helped the company add new blood:
it recruits 1,000-5,000 graduates each year from 200 universities in 80
countries, at a time when Americans and Europeans are choosing finance and
information technology over engineering and science.
Second, the group reaps the benefits of having been incorporated in the Dutch
Antilles (as a private company in the 1950s ? the listing came in New York in
1962). Unbeholden to any single big government, Schlumberger can operate in
places such as Iran, where international political tensions have recently forced
Shell, Total, BP and Halliburton to retreat. Mr Gould admits: ?There is a huge
value in independence and neutrality ... The only place we will not work is if
there is a UN embargo.?
One area where IOCs still have an advantage is the complex and costly process of
liquefying and shipping natural gas. But even in LNG, the international oil
groups are feeling the squeeze as countries question why they should pay any
more than a contractor?s fee.
Total of France may have won the right to help Gazprom, Russia?s state gas
company, to develop the giant Shtokman field but its financial terms are likely
to resemble those of Schlumberger rather than the lucrative production sharing
agreements on which IOCs have until now relied for their enviable profit
margins. It is even uncertain whether Total will be able to book Shtokman?s
reserves. Mr Gould expects this trend will spread: ?Oil companies going to
projects where they don?t own reserves will increase. The question is how the
stock market will value them.?
If recent years are anything to go by, the answer is: poorly. As oil prices have
quadrupled since 2003, Schlumberger?s total return to shareholders has been 370
per cent. ExxonMobil, arguably the most successful but also the biggest of the
international oil companies, returned 155 per cent.
Some argue that much of the injury sustained by international oil companies in
recent decades has been self-inflicted. After the oil price collapse of 1986,
they concentrated on reducing costs and, eventually, consolidating. Between 1998
and 2002, Exxon merged with Mobil, BP took over Amoco and Arco, Total bought
Petrofina and Elf, and Conoco merged with Phillips. The service industry
underwent a similar process: enlarged companies invested in multiple service
lines to stay competitive and widened the international scope of their
operations. That suited the big oil companies, which hired them to carry out the
work they used to do themselves.
But that has cost them their edge in many areas and national oil companies have
turned to service companies to help them grab a bigger share of the profits as
oil prices have risen. In so doing they have squeezed ExxonMobil, BP, Chevron,
Shell and their peers further into the high-risk margins of the industry, such
as drilling in ultra-deep waters, mining tar-like extra heavy oil and developing
projects above the Arctic Circle.
National oil companies are using Schlumberger and its rivals not only to furnish
their wells but for R&D and training. Schlumberger has research operations in
Russia and Saudi Arabia and technological centres in Mexico, Abu Dhabi and
Malaysia, while it also provides training for young engineers. This is
especially important to many oil-rich nations, which have bitter memories of
being forced to defer to IOCs in the early decades of their emergence as
petrostates and are seeking to improve the sophistication of their own oil
companies while securing employment for rapidly growing populations.
Mr Gould (left) is unapologetic about the plight of the international energy
groups. ?IOCs don?t have an access problem for anything but conventional oil,?
he says, adding that the growth of the service industry ?does make what we do
available to everybody ? and that is what might annoy them?.
There is still one notable contrast between Schlumberger and big international
oil companies, says Ben Dell, an analyst who tracks oil services companies for
Sanford Bernstein, the financial services group. ?Schlumberger does not put
capital at risk on major projects, which is the big difference. They have
certainly closed the technology gap, so ExxonMobil and others have less to
offer, but until they want to put billions of dollars of their money into
projects there is still a big difference.?
In return, the Shells and Chevrons of the world seek access to reserves they can
?book? with the Securities and Exchange Commission, the US regulator, and by
which investors then measure the health and attractiveness of the company. In
contrast, Schlumberger is simply paid cash for what it does ? a far more
palatable option for NOCs wary of being seen as giving away their citizens?
riches.
For now, that divergence will remain. Schlumberger still depends on IOCs for
roughly one-quarter of its income and Mr Gould has been careful to reassure his
clients that he will not go head-to-head with them. Indeed, keeping IOCs happy
will become an even more important task for him in the coming three to five
years as the huge number of drilling rigs that international oil companies have
ordered go into service in the deep waters of the Gulf of Mexico, Angola and
Brazil. Schlumberger has been slower than some competitors to get into the
deep-water business.
Even so, that will be the next area of growth for the company ? and there
international oil companies have the upper hand over national competitors except
Petrobras and StatoilHydro. ExxonMobil, BP, Total, Chevron and Shell will thus
regain their importance within Schlumberger?s client list.
Whether or not it can forge successful partnerships it will help determine
whether enough supplies come on to the market to curb further oil price rises.
Success is far from assured, because they will be extracting oil from some of
the trickiest locations on earth, with untried technology and an inexperienced
workforce. Schlumberger?s future standing will in large part be determined by
whether Mr Gould and his international cadre of young engineers are able to
deliver.
.
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