Oilfield services giant Schlumberger invests in crude production to beat out rivals

By investing in its customer projects, Schlumberger does not have to bid for work, all but excludes competition

Schlumberger NV, the world’s largest oilfield services company is spending billions of dollars to invest in its customers’ oil and gas projects.

The arrangement means the company will have a say in drilling decisions, oilfield management and hiring of Schlumberger units for service contracts, the company has told investors.

By working with and investing in its customers projects, Schlumberger does not have to bid for each job associated with a large drilling project and all but excludes its rivals from projects.

The new model could vastly improve profits, but will also boost the company’s exposure to the volatile oil market and could mean potentially big losses if projects fail.  Some analysts are wondering if Schlumberger is taking on too many speculative projects too quickly.

“Schlumberger has been actively participating in these partnerships for a while. It makes a lot of sense given they actively drill and complete all across the country for many operators…so if anyone can get in and be successful as an exploration and production company, it’s them,” Bernadette Johnson, VP of market intelligence for Drillinginfo, said in an email.

So far, the company has taken hundreds of millions of dollars in write-downs or impairments on some of its joint ventures, according to its financial filings.  But, despite the setbacks, the firm has committed money to growing the division, known as Schlumberger Production Management, which was launched in 2011.

The division generated $1.4 billion in revenue and had invested $2.6 billion as of June 30, according to Schlumberger Executive VP Patrick Schorn earlier this summer.

For 2016, Schlumberger’s total oil and gas output reached about 230,000 barrels per day (b/d), almost equal to that of Pioneer Natural Resources.

In 2017, the firm opened a standalone investment fund to provide financing for its ventures.  The company has not disclosed the size of the fund.  According to Reuters, ventures of this type require skills and tolerance for risk that is usually associated with large integrated oil companies, including Chevron and Exxon.

Two such projects include a deepwater LNG project off the coast of Equatorial Guinea and a shale development in Argentina with the country’s oil company YPF SA.

As well, in June, Schlumberger agreed to invest $700 million in an oil exploration project with Nigerian National Petroleum Corp and First Exploration & Production.  Reuters reports for the project to be make a 20 per cent profit, it requires global oil prices to be between $50 to $60 per barrel.

The company’s $390 million investment for a 49 per cent stake in a project in Argentina’s Vaca Muerta shale field with YPF could see the company competing with its customers.  Chevron and Royal Dutch Shell are interested in the project.

Johnson says the market is particularly interested in Schlumberger’s joint-venture activity because the compahy pulled the trigger on several large deals right in a row.

“On one side, there are concerns that Schlumberger is not the go-to company on some of the highly technical aspects of drilling (like Seismic), but on the other hand, there are comments from SM Energy (and others) in the US that point to their Schlumberger Pads as being the best,” she said.

COMPETING WITH CUSTOMERS

As Schlumberger’s production business has grown, it has negotiated deals that include equity in oil and gas fields and as well as deals that give the firm payment based on oil and gas output, according to interviews with customers, partners, investors and former Schlumberger executives.

Schlumberger this year agreed to contribute $390 million for a 49 percent stake in a venture with YPF in Argentina’s Vaca Muerta shale field, which has attracted international oil firms including Chevron and Royal Dutch Shell.

Schlumberger Chief Executive Paal Kibsgaard has downplayed the potential for its production business to compete with its own oil company customers.

He described the enterprise as “a new avenue for project investments alongside our customers” in remarks to investors in April.

Schorn also insisted this spring that the business is “not significantly changing the risk profile … the biggest risk remains the cyclical nature” of the oil and gas industry.