Trading Markets: "Schlumberger and Baker Hughes Prepare For Shale Gas Boom"
The oilfield services industry has made headlines recently, with market leader
Schlumberger making an $11 billion bid for Smith International and Baker Hughes signing a $5.5 billion deal to acquire BJ Services. Both decisions reflect the weight that the upstream industry now attaches to unconventional gas extraction.
The oilfield services industry is a difficult one in which to strategize. The usual business cycle follows oil prices, with high prices encouraging investment in exploration and production (E&P), which in turn stimulates demand for services. The rise was so sharp leading up to July 2008′s record prices that demand tested supply capacity and exposed a skill shortage in the industry. Conversely, the low prices witnessed at the beginning of 2009 discouraged E&P activity, leading to service cost discounts of 65-80% on 2008 levels.
However, in acquiring a new portfolio of skills, Schlumberger and Baker Hughes may have found an alternative to this routine. The natural gas market is seeing major growth, driven by environmental concerns over coal and low gas extraction costs. These lower costs have come as hydraulic fracturing technology or ‘fracking’ has matured and opened up shale reserves to exploitation.
The rapid growth in shale gas extraction in the US is likely to alter the country’s energy profile entirely. Crucially, large oil and gas companies are investing heavily in shale gas E&P and in companies with knowledge of the sector, evidenced by ExxonMobil‘s acquisition of XTO. The potential demand for service companies qualified to operate in this market is vast and may offer a way to hedge their exposure to weak demand in the oil sector.
Schlumberger’s $11 billion bid for Smith International and Baker Hughes’ $5.5 billion acquisition of BJ Services were driven by demand for turn-key contracts under which the service company provides every service required to develop a field. This is especially difficult in an industry as new as shale gas, as skilled engineers with knowledge about fracking are in short supply. Coupled with the industry’s aging workforce, other service companies may struggle to enter this market.
In light of these market conditions, both acquisitions make sense. Although it is the service market leader, Schlumberger lacks expertise in lubricants (which are important to shale gas extraction), making Smith, with its specialization in lubricants, a valuable asset. Smith also has drill bit technology, which is crucial for meeting Schlumberger’s ambition to serve the growing demand for other unconventional forms of extraction such as deepwater drilling.
Similarly, Baker Hughes now has a much stronger portfolio, having acquired BJ Services’ knowledge of ‘pressure pumping’, another critical technology in shale gas extraction. Through their respective acquisitions, both firms have made it clear that they expect unconventional gas to form an increasing share of the US energy mix.
SOURCE:
Trading Markets: “Schlumberger and Baker Hughes Prepare Shale Gas Boom”
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Posted by admin
on March 1st, 2010. Filed under Natural Gas, Shale Gas.
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