Oil Exploration And Production Companies Management Essay

The oilfield service industry is a sector which mainly provides services to the oil exploration and production companies. Schlumberger is the leading name in the oilfield servicing market which has lots of stake in the highly competitive market environment of the Middle East. This report is basically an in depth understanding about the behavior and performance of Schlumberger in the highly competitive environment.

The initial analysis of the report would focus on the qualitative aspects of the oil field service industry. It would provide an overview of about the current trends prevailing in the industry which would help in getting a better understanding about the issues and the current matters taking place. It would provide an in-depth analysis of how the oil and gas prices are affected by the demand in industry.

In order to run a successful business, every company should have a competitive advantage in the market. This aspect would be analyzed through Porter’s five force model, which will identify the sources of competitive forces Schlumberger would face in the market in the future.

The later part of the analysis would focus on the strategic approach of Schlumberger and the positioning of the company in the market with regards to its competitors which are Halliburton, Baker Hughes and Weatherford. The strategic approach identification of each company and the market position would be done by utilizing Porter’s framework of competitive analysis and will help in analyzing the position of the companies through its competitor’s array.

This report will provide insights into the speed with which the competitors in Middle East are able to acquire the market share and also analyze Schlumberger’s value-creating strategy which would determine how long this competitive advantage will last.

List of figures:

Figure 1: Revenue of the Oilfield Service Industry in Billion $

Figure 2: Upstream Capital Expenditure from 2001 – 2013

Figure 3: Average rig Count according to Baker Hughes International

Figure 4: Porter’s five force model

Figure 5: Production of crude oil in the Middle East

Figure 6: Production of natural gas in the Middle East

Figure 7: Revenue of Schlumberger’s competitor’s region-wise

Figure 8: Estimated percentage of merger and acquisitions in next 2 years.

List of Tables:

Table 1: Baker Hughes International Rig Count displaying the active rigs.

Table 2: Relation between WTI crude oil price, upstream CAPEX and avg Rig Count

Table 3: Impact of each force on the oilfield service industry

Table 4: Key success factors of the oilfield service industry

Table 5: Global and Middle East revenues of Schlumberger’s competitor’s in Middle East

Table 6: Comparative analysis of Schlumberger and its competitors

Table 7: Competitor’s array of Schlumberger

Table 8: YTD revenue of Schlumberger’s competitors

Contents

Introduction:

The oil and gas industry seems to have recovered from the slump in 2008-09 due to the economic crisis as we can see that the oil and gas prices are rising for the past three years. The oilfield service industry which is an integral part of the petroleum industry was no exception to this phenomenon. The oilfield service industry which provides services to the exploration industries has witnessed increase in the profitable quarters over the past three years and it continues to grow despite the current Eurozone crisis and all the challenges faced by the service industry due to economic situations such as the BP Deepwater Horizon incident.

Schlumberger, which is the leading oilfield service company all across the globe, enjoys a major market share over other companies and has been one of the most profitable companies amidst all these hardships. As of December 31, 2011, the company had more than 113,000 people of over 140 nationalities working in approximately 85 countries. The company’s revenue touched $39.54 billion in 2011 crossing the highest revenue by any company in this sector.

Schlumberger is located in various geographic areas such North America, Latin America, Middle East/Asia, Europe and Africa. In the Middle East/Asia region, Schlumberger does have a competitive advantage over others but no competitive advantage is permanent. Thus the company has to keep a constant check on its existing competitors and the new players to the oil field services industry. Given the industry context mentioned above, the main aim of this business report is to analyze the current trend in this industry and also to analyze Schlumberger’s competitors in the Middle East to sustain its competitive advantage.

The primary objective of this report is to ensure that Schlumberger is aware of the changes going on in the Middle East that is affecting its ongoing strategies and business plans and also to keep a close eye on its competitor’s new strategies and the advancements they are making. It is also to ensure that their current strategies are in line with the business environment and if not, what changes can be brought about in order to keep it at par with the other competitors within the industry.

The main findings of the project will assist Schlumberger not only in maintaining their strong position within the industry, but will also help them in evaluating and forecasting about the changes in advance and develop their business plans accordingly.

Chapter 1: Literature Review:

Porter five forces Model:

There are a number of management tools which analyze the industry’s profitability despite the existing competitions and changes in the economy. This section will help us in getting an understanding about the appropriate strategies to gauge industry analysis. For getting an understanding about the proper strategic analysis of an industry, there are a few management tools and theories such as SCP Paradigm, Porter five forces model and Value Net model.

The Structure Control Performance framework is derived from the Industrial Organization (IO) economics and it studies the market based on the three elements and also tries to draw a connection between them, (Fu, 2003). Mason (1939, 1949) and Bain (1951, 1956, 1959) as cited in (Goddard, Wilson and Lipcztynski, 2005, p6) had developed the SCP paradigm. It correlates the relationship between the market structure, company conduct and company performance (Ajlouni, 2010). ‘According to this approach, the structure of a market influences the conduct of the firms operating in the market, which in turn influences the performance of those firms’. (Goddard, Wilson and Lipczynski, 2005, p6).

Thus the SCP paradigm analyses the industry in three steps. First, the structure analyses the basic framework of the market which is required by the company for conducting business. It involves the buyers and sellers, barriers to entry, product differentiations, vertical integration and diversifications. Second, the model analyses the behavior of the firms to get an in depth analysis about the business objectives, pricing policies, research and development, acquisitions and mergers. The third, performance describes the parameters required to measure the performance of the industry through profitability, growth and increase efficiency.

The SCP Paradigm is based mainly on empirical research than on theoretical aspects and it was one of the dominant models till the early 1980s (Slade, 2003). Thus there were many criticisms about the model because of its dependence on the empirical researches and one of the main problems of the paradigm was to analyze many of the variables in each factor of the paradigm. The further growth on the Industrial Organization witnessed the introduction of Porter’s five forces model.

One of the well-known and an important framework is Porter Five Forces Model. Porter’s five forces is heavily influenced by the SCP Paradigm as one the ‘Structure’ of the paradigm is basically the Porter Five Forces model and the other ‘Performance’ is outcome of Porter’s model which is the profitability (Goddard, Wilson and Lipcztynski, 2005, p16-18). Micheal E.Porter (1979) developed this model which attempts to handle the main forces which affect the industry structure. Porter five forces model tries to explain the industry structure and the competitive conditions by evaluating the following forces: the risk of new entry in the industry, the degree of rivalry among established competitors, the bargaining power of buyers and suppliers and the threat of substitute products. According to Porter, the presence of stronger forces of the model, make the business environment of the industry to be more challenging and is less attractive to the investors. On the contrary, if the forces are weak, then the companies seem to be in a more profitable condition as there would be less competition in the market.

According to Kevin Coyne and Somu Subramanian (1996) as cited in The McKinsey Quarterly(2001), this model is built under three essential assumptions: Firstly, the buyers, suppliers, substitutes and competitors are not related and do not interact with each other in the industry. Secondly, more capital will be available to the companies that have a structural advantage over their competitors and potential entrants. Thirdly, there is much lower risk involvement which let the companies in the market to plan properly and prepare a strategy accordingly.

According to Mintzberg (1994), Porter assumption that future of the industry can be predicted based on the present market conditions is being discarded by Mintzberg. He explains that a company cannot forecast future market conditions precisely owing to economic changes and also technological innovations.

Every model has its limitations and criticisms and Porter Five forces model is no exception to it. The limitations are: Firstly, the model was based originally on the economic situation of the eighties when there was a strong competition and relatively stable market structures. Second, it does not focus on the different challenges that a company faces as it enters international arena. The challenges faced by them in other nations are extremely different in comparison to what it faces in its own nation. Third, Porter takes into consideration only the industrial factors, whereas it overlooks the company resources available to the industry without which the profitability of the industry cannot be determined. Finally, as and when the companies expand, they diversify themselves into various other markets and other regions and thus the model does not concentrate on role of expansions and various acquisitions (Parnell, 2004, p50-51).

Brandenberger and Nalebuff (1985) as cited in Unknown (n.d.) too identified an important flaw in the Porter model. In the book, Coopetition (Competition + Co-operation), has been discussed but the model ignores the strategic alliance which exists between some industries and which in turn helps each other to bring out a finalized product. These are mainly known as complementors in business terminology. Thus Brandenberger and Nalebuff in addition to suppliers, consumers and competitors introduced a new force namely the ‘complementors’. This was known as “Value Net”. This is basically an extension of the Porter’s model and is known by the name of Value Net model. Porter’s five forces analyze what are the challenges in the face of their growth opportunities whereas Value Net model analyses threats and opportunities available to the industry (Unknown, n.d.).

‘Porter admits that “developing a strategy in a new emerging industry or in a business undergoing revolutionary technological change is a daunting proposition” (Downes and Mui, 2000, p60). According to Downes and Mui, Porter explains that the new digitalized and high tech world comes with a lot of complexities and developing a full proof strategy is a daunting task and this does not mean that the old rules are invalid. But if we look around in today’s work environment, we will find that every industry is heavily dependent on the new technology. Thus Downes and Mui introduced three new forces to the Porter five force model namely Digitalization, Globalization and Deregulation (Downes and Mui, 2000, p64-67). These are the driving forces which steers the modern business houses in the right direction and amongst these the most important force is Digitalization.

Thus the setback with the Porter’s framework is the absence of the digitalization force which has revamped the industries with the introduction of modern technology.

Though from the above discussion it may appear that Porter five forces is outdated as it does not consider digitalization. But if we consider both its assumptions and limitations, it is one of the effective management tools that can be used in business and can easily be understood by the managers.

Porter’s Competitive Framework:

There are different strategic frameworks available which would be helpful for doing a competitor analysis. The most prominent among them are Porter’s Competitive Framework and SWOT analysis. Porter’s Competitive Framework is a management tool which is used to analyze the industry on four basic elements namely: future goals, current strategies, assumptions and capabilities. Future goals discuss what drives the competitor, current strategy discusses what a competitor is doing or can do, assumptions focus on the supposition made by the firm about itself and the industry and capabilities discuss about the strengths and weaknesses of the firm (Porter, 1980). This is one of the most prominent frameworks but a lot of researches are based on assumptions about competitor analysis which is discussed below.

A lot of scholars have defined what a competitor’s analysis is but the most difficult part is the evaluation of the competitor at a firm level (Tsai, Su and Chen, 2011). A number of studies have been conducted on how a competitor could be analyzed at a firm level. Porac et al, 1995 presented a cognitive model which is developed on the basis of the observation the firm makes about its competitor’s actions and reactions and then decide on its strategy. Also, Baum and Lant (2003) as cited in (Tsai, Su and Chen, 2011) illustrated that resemblance in geographic location, price and size are sufficient for a firm to have an idea about their competitors. Chen in 1996 gave a different perspective of competitor by introducing the ‘two-firm’ concept explaining that a competitor analysis is mainly based on market commonality and resource similarity. But many researchers found the two-firm concept to be difficult to relate with the competitor analysis.

Competitor’s analysis is necessary for every enterprise as because there may be certain gaps which the company might not foresee while making competitive decisions. Zajac and Bazerman(1991) discussed the relation between the strategic decision making process and competitive analysis and named the gap between them as ‘competitive blind spots’. They discussed how a wrong assumption by a firm about its competitor may result in blind spots. Rothschild (1979) too discussed on where the companies many miss the link and what are the questions to be posed for a proper competitor analysis. Tsai, Su and Chen, 2011 gave a different perspective with regard to the competitor analysis by introducing the concept of ‘competitor acumen’. It illustrated about the relationship between the different firms in the same industry and also the extent to which a firm can understand its competitors.

Every researcher mentioned above has challenged the Porter’s framework but none of these have the same prominence as Porter’s framework. However, there exists a challenge which in the Porter’s framework that cannot be ignored. Porter does discuss about the fact that when a competitor analysis is done, a firm should know both its direct (current) and indirect (emerging) competitors. However, it does not discuss whether a firm should consider all its competitors or only the top three or four or just a bunch of them. Thus the firm has to analyze the industry first, identify its competitors and then go for competitor analysis (Rao, 2011).

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The SWOT analysis focuses on the Strength, Weakness, Opportunity and Threats which a firm faces and its advantages in comparison to other competitors in the marketplace. SWOT analysis has a lot of advantages, for example its framework is extremely simple which helps a firm to identify its focus and can be applied to many intelligence reports like market intelligence. The analysis has a drawback as well. It can be too private and disconnected from the realities that are impacting the company (Evans, n.d, p7).

Since Strength and Weakness part is been covered in the Capabilities part of the Porter’s framework and Opportunities and Threats are also discussed, it is an important competitor analysis tool despites its limitation.

Chapter 2: Oilfield Service (OFS) Industry and its trends:

2.1 Background of the Oil Field Service Industry

The energy sector comprises of the petroleum (oil and gas industry), electric power, coal, nuclear power and the renewable energy industries. The petroleum industry plays an important role in this sector as crude oil and unconventional natural gas account for a large percentage in world’s energy consumption which is around 56% (BP, 2012). Thus, the work of the petroleum industry is primarily classified into two main activities namely- upstream and downstream activities.

The upstream activities in this industry are the exploration and production activities. The exploration activities include locating of the hydrocarbon reserves, such as oil and gas reserves, which can be done through desk study, aerial survey and seismic survey. After locating the reserves, the next step is to drill the surface and pump the hydrocarbon out of the reserves. This can be done both on the onshore (water) and offshore (land) through drilling rigs. After the drilling and getting an idea about the size of the oil field, the next step would be production and development activity where the oil and gas is produced through various techniques and services.

After the oil and gas has been extracted from the reservoir and brought to the surface, it is then taken to the refineries where the downstream activities begin. The downstream activities in the industry include refining and processing of the oil and gas products and then further distribution of these products through various distribution channels like the retailers, distribution companies, chemical plants etc.

The important industry which supports the upstream activities is the oilfield service industry. The oilfield service industry provides equipment and services which are utilized in the exploration and extraction of the hydrocarbons mainly oil and gas. This industry is thus the backbone of the oil and natural gas industry providing various services and equipments for the proper running of the industry.

(Etechinternational, n.d.)

2.2 Demand for the oilfield service industry:

The demand for the oil field services industry in the market can be measured in terms of the revenue generated by the industry over the years. Given below is the revenue generated by the industry in USD billion over the years from 2007-2011 and it also states about the forecast of the industry for the next five years till 2016.

(Source: MarketLine, 2012)

Figure 1: Revenue of the Oilfield Service Industry in Billion $

The global revenue of the industry increased till the 2008 where it reached the highest point of USD 361.9 billion. Then there was a decrease in the revenue in 2009 to USD 256.9 billion where the revenue declined by 29.1% mainly due to the global economic and financial crisis resulting in the drop of the oil price. The WTI Crude Oil Price for past few years (refer Appendix 1) indicates that the oil price was once at its peak in 2008 at $145.16/barrel (Yahoo Charts, 2012) and then there was a sudden drop in the oil price and this price drop did sustain in the industry for quite sometime. This drop in the price of the oil led to loss of billions of dollars due to various macro and micro-economic factors in the market (Hamilton, 2009).

But later on after the financial crisis, the industry started to improve its business and now since the market has been stabilized and it seems to be rising and expected to reach global revenue of $638.4 billion by 2016 (MarketLine 2012).

Knowing the basics of the oilfield service industry, gives us a brief idea about the indicators which is extremely useful for understanding the growth of the industry and the factors influencing its growth.

2.2 a Upstream Capital Expenditure:

The growth of the oilfield service industry also depends upon the capital expenditure of the companies in the upstream industry. The companies in the upstream industry is basically segregated into large integrated super-major oil and natural gas companies, international independent oil and natural gas companies which are also known as the International Oil Companies(IOC’s), and the national or state-owned oil companies known as the National Oil companies(NOC’s). Thus the upstream expenditure will result as a combination of all these three types of companies.

The upstream capital expenditure appears to be rising over the past few years and is expected to be profitable over the next few years as well. The total capital expenditure was estimated to be USD 450 billion in 2011(Brown, n.d), which was at an all time high over the years and the oil field service industry seemed profitable at this juncture. The oil and gas exploration and production capital expenditure (CAPEX) for the past decade and for the next few years is shown below.

(Source: Combination of WoodMackenzie Corporate Analysis Tool and Upstream Service cited in Brown,n.d and Energy Equipment and Support Services Oilfield Services Sector Report, 2010, please refer Appendix 2 and 3)

Figure 2: Upstream Capital Expenditure from 2001 – 2013

In the above figure we see that the upstream capital expenditure does not include the exploration and appraisal spend. In this graph, we see that the expenditure was increasing until 2008, after which there was a dip in 2009 due to the global economic and financial crisis.

2.2b Rig Count:

There are many indicators where the investors of oilfield service industry can gauge the growth or the demand of the industry. The upstream capital expenditure is one of the principal indicators which provide insights on how the industry is generating the revenue but the major concern with the upstream capital expenditure is that the figures are not released on a timely basis as it is shown in the quarterly or the annual report. So it is difficult to have updated information for a particular period of time like weekly or monthly about the industry.

Thus, to have timely updates about the industry, another important indicator which helps the investors to know about the global demands of the industry is known as the rig count. The rig count indicates the number of rigs which are currently active in the industry and this shows the number of active rigs, and the specific areas has more demand indicating the demand for more labor. It is very easy and the quickest way for accessing the growth in the oil field service industry. It is used by many companies, analysts like for example Wall Street analysts use the rig count for profit projections from the oil field service companies (Sprehe, 2004).

There are a number of rig counts available to serve the industry like the Baker Hughes, Smith Tools but the most commonly used rig count is the Baker Hughes (BHI) rig count as it is one of the oldest rig counts in the industry. Baker Hughes Rig count gives a weekly update on the North America rigs and a monthly update on the International rigs.

Area

Last Count

Count

Change from Prior Count

Date of Prior Count

Change from Last Year

Date of Last Year’s Count

US

17-Aug-12

1914

-17

10-Aug-12

-60

19-Aug-11

Canada

17-Aug-12

326

+27

10-Aug-12

-160

19-Aug-11

International

Jul-12

1264

-21

Jun-12

+114

Jul-12

(Source: BHI Rig Count as on 20-Aug-12, Baker Hughes Investor Relations, Rig Count)

Table 1: Baker Hughes International Rig Count displaying the active rigs

As we see in the above table, it shows the update on the active rigs in America, Canada and in the International arena as well where we can see that the last count for the America rigs is on the 17-August 2012(weekly) whereas for International it is July 2012(monthly). This table also analyses the changes in the active rig count from the date of prior count. This table also presents before us a clear picture on how the industry has grown comparing from previous year’s figures (Baker Hughes Investor Relations, Rig Count, 2012).

The Baker Hughes rig count measures the number of rigs which are actually being drilled at a give point of time on a weekly (North America) and monthly (rest of world) basis. This indicator also provides additional information like rig count in different states, or whether the rigs were used for drilling the oil or the natural gas from the surface. A lot of products and services are required for an active rig and thus the use of these products and services show the demand for the services provided by the oilfield service industry (Brener, 2008). An increase or decrease in the rig count also shows the fluctuations in the job market of the oilfield service industry. Increase in rig count increases the job opportunities in the oilfield.

The BHI count considers the count of ‘active’ rigs which means the rigs which are actually drilling holes on the land or the sea to extract the oil or the gas. Therefore, if a rig is being transferred from one location to another, or is being involved in non-drilling activities like casing or completion and production activities, then Baker Hughes does not count the rig as active, even if the activity is still being performed at the field by a number of suppliers and outworkers. Though the rig count provides us with a brief idea about the drilling activity, it does not show many other important factors. The factors which the rig count does not focus on are production activities, depth, cost and location (Brener, 2008).

The chart shows the average rig count worldwide from 2000 to June 2012 and we can observe that number of rigs have been on the increasing trend apart from when there was a dip during the financial crisis which hit the industry adversely.

(Source: Baker Hughes Investor relations, Rig Count 2012).

Figure 3: Global average Rig Count (Oil + Gas + Misc) according to Baker Hughes International

The average rig counts for 2011-present from various geographical locations is shown in Appendix 4 where we observe that North America has been leading all the way and that is where the companies generate the maximum amount of revenue.

2.2c Current Industry Trend:

The trends of an industry help us to understand what are the current issues and their effect which help us to speculate the likelihood of its impact in the future. There have been many other micro and macro factors which affect the industry trends like government rules and regulations, the oil and gas demand and supply etc which ultimately are the main reasons for the fluctuations in oil and gas price. Thus the trend of the industry can be known from the fluctuations in the oil and gas prices. High prices are beneficial for the industry and vice-versa. The following table shows the relation between the WTI oil price, upstream capital spending and the rig count.

 

Avg. oil rig count

 

 

Int.

N.A.

Canada

Avg. WTI Oil Price

2007

768

297

127

76

2008

814

379

161

87

2009

764

278

103

55

2010

825

591

199

80.5

2011

897

984

278

95.5

2012(August)

946

1344

260

93.5

(Source: Avg.WTI Crude Oil Price – Average WTI crude oil price – Yahoo Charts.

Upstream CAPEX – Combination of WoodMackenzie Corporate Analysis Tool and Upstream Service cited in Brown, n.d and Energy Equipment and Support Services Oilfield Services Sector Report, 2010, please refer Appendix 2 and 3.

Average oil Rig Count – Baker Hughes Investor Relations)

Table 2: Relation between WTI crude oil price, upstream CAPEX and oil Rig Count

The above table shows the main trends in the industry indicating that the it’s demand is dependent on the Upstream CAPEX and Rig count which depend on the WTI crude oil price. This shows that when crude oil price increase, there is a tendency for the investors to invest more in this industry. We see a dip in 2008 due to the economic crisis but in this year we saw that the highest price was $145.16 per barrel in July and the lowest was $30.28 per barrel in December. The average rig counts has also seen a dip during the year 2009 from 2008 indicating that there was less demand of labor during that year. Thus we can suggest that the Rig Count depends on the Investment in the Upstream Industry which in turn is dependent on various factors such as crude oil and gas price fluctuations.

Having known the trend in the industry we need to analyze how a company will maintain its profitability in different economic situation which holds good for the future as well. This can be analyzed in the next chapter using the Porter Five Forces Model.

Chapter 3: Porter five forces analysis:

In order to know the profitability of an industry, the corporate strategists suggest using the Porter five forces model as it is the best way for anticipating the competitive environment. Porter (2008) said ‘Understanding the competitive forces, and their underlying causes, reveals the roots of an industry’s current profitability while providing a framework for anticipating and influencing competition (and profitability) over time’.

The Porter 5 forces are: Rivalry among existing customers, Threats of substitutes, Power of suppliers, Power of buyers and Threats of new entrants. The impact of the forces on this industry is shown in the following table:

Forces

Impact

Rivalry among the existing competitors

HIGH

Power of Suppliers

MODERATE

Threat of Substitutes

LOW

Power of Buyers

HIGH

Threat of New Entrants

LOW

Table 3: Impact of each force on the oilfield service industry

(Source: 12manage, n.d.)

Figure 4: Porter’s five force model

3. a Threat of new entrants:

If we consider this particular industry, then one thing that is pretty clear is that the competitors have been operating in this sector for many years and giving them a tough challenge is not an easy task. An ideal new entrant tries to enter and capture the market share and put pressure on the competitors directly by applying new technology and new ideas.

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The impact of the new entrants in the oilfield service industry is low. The presence of global market players such as Halliburton, Schlumberger and Baker Hughes create high barriers to enter in this industry and also a significant amount of investment is required to set up their services like the offshore and onshore rigs. Apart from the investment a new entrant requires skilled labor and experienced manpower which would help it to establish itself in the industry. Finding skilled labor in the oil industry is one of the major challenges faced by the entrepreneurs.

The economies of scale like replication of projects, management techniques, standardization is also very high in this industry, thereby creating another obstacle for the entry of the new players (Sahu and Parekh, 2012). These high barriers in the entrance way are an added advantage to the established firms and are major determinants of the firm’s profit. This allows the existing firms in the industry to maintain their monopoly in the market. (Ajlouni, 2010)

The key to success for a new entrant in this industry are the important resources like skilled labor and manpower, investments without which the company cannot produce economies of scale are considered an expensive barrier.

3. b Bargaining power of buyers:

The oilfield service companies compete with each other by bidding low cost services to win contracts from the IOC’s and NOC’s. The factors which are needed to be considered with the cost are the quality of the service they provide along with speed at which it is delivered. Thus low cost plays an important role because there is intense competition between the international oil companies and the national oil companies and so there is immense pressure on the oilfield service companies for providing the clients with lower prices without compromising the quality of service and faster delivery.

Also the presence of differentiated products which the company can provide is essential as it would prevent the customers to switch from one to other oil field service providers available in the market. Companies like Schlumberger and Halliburton has developed their own technology which is not available in other companies. For instance, Schlumberger recently launched IsoMetrix marine isometric seismic technology which has the ability to capture the wavelength which is returned in three dimensions providing the solution of the precise images of the subsurface (MarketWatch, 2012). This is the first ever technology in the industry and this motivates the customer to opt for their products.

Customers usually give more preference to a differentiated product (value) than just price and sometimes there may be migration of buyers between companies. The reasons for the migration might be lack of customer focus, less than superior service and poor price management practices. As described by Reichheld (1996), that customer loyalty is created by superior service and not just good service. The customer’s satisfaction gives supplier a competitive advantage and an edge over others.

Thus the bargaining power of buyers is high and the key to success is the bargaining with the buyers with regard to the differentiated products and a superior service which would help the company to succeed over other companies.

3. c Bargaining power of Suppliers:

The power of suppliers has low impact on the oilfield service industry. The power of suppliers mainly depends on the factors like quality of the product, time of delivery and the price of the products (Porter, 2008).

Suppliers in this industry might vary depending on the structure and the function of the equipments and services the company provides. In this industry suppliers supply raw materials which are used in the manufacture of drilling rigs and other useful equipments. The inputs for the rigs such as iron, steel would have numerous local suppliers creating a tough competition in the market. On the offshore and onshore sites, food and other supplies are necessary for the staff to carry out their operations and the suppliers would have greater power. Thus the switching cost of suppliers is extremely high in this industry.

Apart from this, companies manufactures and supplies the products by themselves which doesn’t allows them not to get involved with the third party suppliers and other distributors in the market. For instance, Baker Hughes manufactures and supplies drill bits and fixed-cutter polycrystalline diamond compact (PDC) bits. It supplies them to the upstream exploration industry globally (Baker Hughes, Datamonitor, 2011). Thus the bargaining power in this industry is considerably moderate.

Thus the key to success for bargaining from suppliers would be manufacturing its own equipments in order to avoid the supplier involvement.

3. d Threat of substitutes:

There is no direct or particular substitute for the products in this industry. The products and services like drilling bits, artificial lifts and wire-line technology are difficult to replace and there are no substitutes available for these. But there are times when companies change their product like Halliburton recently changed the product guar gum, a key ingredient in fluids used in the hydraulic fracturing process by Permstim (Seeking Alpha, 2012) which is a cleaner, tougher and provides the same functionality in a much cost-effective manner. The reason the company for changing it was that the company had purchased excess guar gum in the beginning and the cost of guar gum was very high for the first two quarters therefore reducing the profit margins (Financial Post, 2012). Owing to such a situation, the company had to introduce a substitute.

The companies which invest heavily on R & D try to come up with innovative technologies which act as a substitute for the existing technologies. But these technologies take several years to be launched and executed properly even though its performance is much better. Thus the overall threat of substitute is low in this industry.

Thus the key for success from threat of substitutes would be an innovative technology and high investment on Research and Development.

3. e Rivalry among existing firms:

The rivalry among the existing firms is very high in the market as the leading players in this industry namely Schlumberger, Halliburton, Baker Hughes and Weatherford are extremely competitive global players and have very little to differentiate among them. With high exit barriers and huge fixed costs, it would be difficult for the companies to divest their assets when they leave the marketplace thus increasing the rivalry power. Thus the rivalry among the firms is high and will be discussed in detail in the following chapter.

The key success factors can be summarized as follows:

Porter’s 5 Five forces

Key Success Factor

Threat of New Entrant

Skilled Labor and Manpower

Bargaining power of buyer

Differentiated Product

Bargaining power of supplier

Manufacturing own products and equipments

Threat of Substitutes

Technology Innovation

Table 4: Key success factors of the oilfield service industry

Chapter 4: Identification of leading companies in the OFS market:

This section would provide an analysis on the identification of the leading companies in the OFS Industry in the Middle East.

4.1 Overview of the Market in Middle East:

The Oilfield service companies also face serious challenge from a number of private companies, both international and domestic players. While most of the customers prefer services from the seasoned International players like Schlumberger, Halliburton, Weatherford and Baker Hughes, many NOC’s are encouraged to support the local players for the growth of the national economy as this industry is ruled by the international players. Many advantages and opportunities are being provided to the local players and they are expanding their stake in the market by allying with partners who provide them with cutting edge solutions to meet up with the expectation of the NOCs. But in certain markets the opportunity for private and local companies is scarce like in Iraq where only five companies are asked to participate in the country’s oil fields namely Schlumberger, Halliburton, Weatherford, Baker Hughes and Oil Serv. (Deloitte, 2012).

Over the next five years, the Middle East region will see a significant rise in hydrocarbon production because most of the countries have been dependant on this region for the supply of oil and gas (BP, 2012).

(Source, Telegraph, 2011).

The change in oil production techniques and services over next few years may not be same for all the countries and it may increase or decrease in accordance with various situations. The medium-term forecast according to the International Energy Agency (IEA) for different countries in Middle East are: a significant increase in Iraq, moderate growth in the United Arab Emirates, no change in Saudi Arabia and Kuwait, and a reduction in Iran over the next five years (Panorama, 2012).

(Source: BP, 2012)

Figure 5: Production of crude oil in the Middle East

Whereas the unconventional gas production in the Middle East has increased considerably over the past 10 years, in contrast to oil production, which has remained unchanged as compared to unconventional natural gas.

(Source: BP, 2012)

Figure 6: Production of natural gas in the Middle East

In some countries like Saudi Arabia, the United Arab Emirates and Iran, this increase has been due to the considerable increase in the local demand, whilst in countries like Qatar, the main reason for increase has been the increasing demand in the gas exports (Panorama, 2012).

Thus from this comprehensive knowledge about the trends and market environment in the Middle East, we can sketch a comprehensive idea about the competitor analysis on Schlumberger for sustaining its competitive advantage.

4.2 Identification of competitors in the Middle East market:

Competitor identification is an important activity for managers and businesses to keep an eye on the competitive environment in the industry and develop strategies depending upon the competitor’s actions (Peteraf and Bergen, 2002). As cited in Smith et.al (1992) by Peteraf and Bergen (2002) that competitor identification is an important pre-requisite for competitor analysis and for postulating a firm’s strategy.

The Oil field Service Firms may be three types. The first type of firm is the one which produce and sell expensive kit for the use of the onshore drilling rigs or offshore seabeds. The firms which can be included in this category are FMC, Cameron and National Oilwell Varco. The next category of firms is the one which own and lease out drill-rigs. These companies which can be placed under this genre are Transocean, Seadrill, Noble and Rowan. The third category is the one in which the companies are mainly engaged in exploring and extracting the oil from the oil reserves. In this report, we will mainly focus our attention in this type of firm. Thus the companies which are dominant in this sector are Schlumberger, Halliburton, Baker Hughes, and Weatherford International (Economist, 2012). These companies provide support and services to the oil companies and help in the various processes with regard to the extraction of oil.

After knowing about the basics of the oilfield service firms, let us now focus on the annual revenue earned by this firm. Given below is the revenue which is earned by the leading companies in this sector for Q2 2012 globally and in the Middle East.

Sl.No

Company

Symbol

Middle East Revenue

Global Revenue

1

Schlumberger

SLB

$2,193

$10,350

2

Halliburton

HAL

$1,059

$7,234

3

Baker Hughes

BHI

$804

$5,005

4

Weatherford

WFT

$782

$3,778

(Source: Q2 2012 results of the respective companies)

Table 5: Global and Middle East revenues of Schlumberger’s competitor’s in Middle East

The figures presented above are from the annual report of 2011 of the respective companies. If we observe closely, then we can see that Schlumberger has generated the maximum revenue over other companies and it is one of the leading oilfield service companies.

Henceforth the report is going to concentrate mainly on the competitor analysis on the company Schlumberger and how they are affecting the business as a whole. The following chapters would provide competitive analysis using the Porter’s framework where an insight would be provided on how the competitor’s future strategy would be and what are the parameters which Schlumberger would have to concentrate upon to sustain its competitive advantage over other companies.

4.3 Overview of Schlumberger:

Schlumberger is a one of the leading oilfield service companies in the international arena which has major percentage of market share in the global oilfield service sector. The company has always had a competitive advantage over its competitors in all the regions except North America where Halliburton is the leading oilfield service provider. The following graph shows that the revenue of different companies in different regions for 2011.

(Source: 2011 Company Annual Reports)

Figure 7: Revenue of Schlumberger’s competitor’s region-wise

The company generates its maximum revenue from the North America which is about 33.6% of the total revenue. From the Middle East, the company generates 22.1% of its revenue.

Schlumberger has its offices spread over the Middle East region with its hub in Dubai. In 2006, Schlumberger had inaugurated Middle East’s first Research Centre known as the Schlumberger Dhahran Research Center (SDRC) in Saudi Arabia which was established with the aim of meeting up with the global energy demand. In 2007, the company had opened a Middle East training Centre in Abu Dhabi which helps professionals to attain various skills and expertise required in the oil field service industry whereby they can face the challenges with ease and have an advantage over its competitors.

Having known about the competitors of the company and getting an overview of the company itself, will help us to construct a comparative table of Schlumberger with its competitors on the basis of certain factors to get a better picture of the market.

4.4 Comparative table of Schlumberger with its competitors:

 

Schlumberger

Halliburton

Baker Hughes

Weatherford

Headquarter

Houston, Texas

Dubai, UAE

Houston, Texas

Geneva, Switzerland

Employees(as of 2011)

113000

68000

57700

61000

Operations

85 countries approx

80 countries approx

80 countries

Over 100 countries

Operating Regions

North America, Latin America, Europe, CIS, Africa, Middle East and Asia

North America, Latin America, Europe, Africa, CIS, Middle East and Asia

Middle East, Asia Pacific, Europe, Africa, Russian Caspian, Latin America, North America

Middle East, North Africa, Asia, Europe, West Africa, Soviet Union, Latin America, North America

Capital Expenditure

$4 Billion

$2.9 Billion

$2.5 Billion

$1.5 Billion

Revenue in 2011

$36.9 Billion

$24.8 Billion

$19.8 Billion

$12.9 Billion

Investment in R&D

$1070.1 million

$401 million

$462 million

$245 million

Product Lines

18

11

11

10

Product Groups

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Reservoir Characterization Group, Drilling Group and Reservoir Production Group

Completion &Production segment and Drilling and Evaluation segment

Completion &Production segment and Drilling and Evaluation segment

Drilling, Evaluation, Completion, Production and Intervention

Competitive factors

Technology Innovation, Quality of Service and Price Differentiation

Price, Service delivery, Health &Safety, Service Quality, Global Talent, Product Quality, Warranty, Technical Proficiency, Understanding of the geological characteristics of the hydrocarbon reservoir

Product &Service Quality, Availability, Reliability, Healthy &Safety, Price, Technical Proficiency

Performance, Safety, Quality, Reliability, Service, Price, Response Time, Breadth of products.

(Source: 2011 Annual Reports of the respective companies)

Table 6: Comparative analysis of Schlumberger and its competitors

Chapter 5: Competitor Analysis of Schlumberger using Porter’s framework of Competitive analysis:

Having known that there is high rivalry among the existing competitors, it is necessary for Schlumberger to have a thorough plan analysis which will help them to sustain their competitive advantage over other companies and it can be done through Porter’s framework of competitive analysis under the following headings: future goals, current strategy, assumptions and capabilities which determine the competitor’s response profile.

(Source: Magda, 2011)

Figure 8: Porter’s Framework for Competitor’s analysis

A detailed analysis about the competitors is present below and the ‘Assumptions’ part is not discussed as it has already been the focal point of our discussion in Chapter 2 and 3 of this report. The Current Strategy has been explained in Appendix 5 with the use of Strategic Diamond and has been summarized for every competitor in the main report.

5.1 Schlumberger:

Future Goals:

One of the short term visions for the company is to find conventional oil sources to meet the demand for energy faced by the oil and gas industry by the end of the decade. By 2035, this proportion would have climbed by two-thirds and thus Schlumberger aims to reduce the exploration risk of developing new supplies of oil and gas (Inside Schlumberger, 2012). In the Middle East, it believes to have the 2020 vision developed by David Woodward of Abu Dhabi Company for Onshore Oil Operations which primarily discusses the challenges to be met in future by the companies due to increase in the demand for energy. (Schlumberger, 1993)

Current Strategy:

The company has a unique strategy which has helped them to increase its stake in the market over the years by slowly gaining new markets and by acquiring local firms and using its customized technologies and management techniques and at the same time maintaining the local culture and flavor which exists in the region. Due to its transnational strategy, it has emerged as one of the most successful companies in this genre. (Schlumberger, 2011)

Capabilities – Strengths and Weakness:

Strengths:

Schlumberger’s greatest strength is that it is one of the leading oil field service companies which has the maximum share in this sector in different parts of the world except North America. If we take into consideration the overall market share of the company, then there is no doubt about the fact that it is one of the strongest market leaders in this genre.

Schlumberger has been investing in a lot on technological innovations and it’s the leading name in most of its product line. It is the only oilfield services company that provides seismic services as an integral part of its portfolio of technological products. (Schlumberger, 2011)

Weakness:

One of the weaknesses of Schlumberger is the reluctance of the entrepreneurs to pay due attention to the health and safety of the employees. Last year recorded a number of fatalities and now the company has taken up this issue as their number primary concern. (Schlumberger, 2011)

5.2 Baker Hughes:

Future Goals:

The goal of Baker Hughes is to increase its stake in the market and to focus on all the long term profitable growth factors which it aims to achieve by building global capabilities and deploying customized local solutions by improving the focus on customer, achieving operational effectiveness and optimizing product portfolio. In view of these objectives for attaining operational effectiveness, Baker Hughes in 2009 set a goal in Supply Chain to simultaneously generate $300 million in cost savings over the next three years. (Baker Hughes, 2011)

Current Strategy:

Continuously improving efficiency, productivity and quality of products through innovation, invention and developing new products to meet the needs of the clients and also to function in an efficient manner. It has also been expanding through acquisitions, like the recently acquired BJ Services and it has been spending continuously for expansion of existing facilities in various regions. (Strategic Framework is shown in appendix 7).

Capabilities – Strengths and Weaknesses:

Strengths:

Wide Product Portfolio – Baker Hughes is one of the companies in the market which has diverse products suiting the need of the different markets as shown in the comparative analysis table. Overall it has 22 product lines out of which 11 are for oilfield services. (Baker Hughes, 2011)

Strong focus on R & D – R &D is always important to a company which aims to keep it at par with the technological innovations and thereby develop new products and technologies which gives them a competitive edge over the other firms. R & D will lead to innovations which in turn promise higher economic returns and production rates. It has invested around $462 million in 2011 which is about 2% of the total revenue. (Baker Hughes, 2011)

Weakness:

The main weakness of Baker Hughes is its backlog in technical expertise as it does not have enough skilled labors which the national oil companies might need to develop their complex and unconventional reservoirs. (Baker Hughes, 2011)

5.3 Halliburton:

Future Goals:

When Halliburton considers its values, it believes that ‘supplier diversity’ gives the company a competitive advantage in the market. Over the years the company’s, supplier diversity has been an very important part of long-term strategy and this is the main focus of Halliburton’s Vision which is ‘to be recognized as global leader in supplier diversity among the oilfield services (Halliburton Supplier Diversity, 2012). Also in 2007, Halliburton wanted to invest $80billion over the next five years in view of its strategic move for establishing its headquarters in Dubai, UAE. (GulfNews, Business, Oil and Gas, 2011)

Current Strategy:

According to the 2011 Annual Report of the enterprise, the current business strategy is ‘to secure a distinct and sustainable competitive position as an oilfield service company by delivering services and products to our customers that maximize their production and recovery and realize proven reserves from difficult environments’.

At an operational level, Halliburton in 2011 carried out several initiatives which would help the company to increase manufacturing different tools in Eastern Hemisphere and restructure the service delivery platform to lower the delivery costs.

(Halliburton, 2011)

Capabilities – Strengths and Weaknesses

Strengths:

The company strength has been the North American market from where the company generates the maximum amount of revenue in comparison to the different regions in the world. It has an advantage there because of its low-cost and highly efficient “frac of the future” model, a unique model and which is quite tough to reciprocate (SeekingAlpha, 2012). The fully integrated drilling solutions that have been developed by the organization has also given this organization an advantage over others.

Weakness:

The company has been involved in many litigation issues like the BP Deepwater Horizon incident which occurred in 2010 (Information Management, 2012) and Barracuda-Caratinga arbitration. These litigation issues has spoiled the reputation of the company to a great extent and also caused to incur huge loss (Halliburton, 2011).

5.4 Weatherford:

Future Goals:

The company has a long-term goal which aims at developing the businesses, providing high quality service to the customers and most important goal is creating value for the shareholders. The company believes that its long-term goal will be determined by its ability to effectively manage any industry cyclicality, respond to the industry demands and successfully maximize the benefits from the acquisitions. (Weatherford, 2011)

Current Strategy:

The current strategy of the company is to focus on the growth of the company through acquisitions and also concentrate on internal research and development to achieve the long-term goals. It has had 250 acquisitions in last 13 years and it is growing at a fast pace. (Weatherford, 2011)

Capabilities – Strengths and Weaknesses:

Strengths:

Focus on Growth – The company has always focused on the acquisition and its International growth has been one of its strengths when compared to its competitors. Weatherford Laboratories are the largest in the world with a huge network of 38 labs in 22 countries. (Weatherford, 2011)

Weakness:

Tax Issues – The multi-national tax structure is extremely complicated, and the company has reported material weakness in its financial reports of 2010 and 2011 (Weatherford, 2011). The organization believes that if it does not resolve these issues fast, it might lose customers which would indirectly affect the share price and it might end up in litigation issues.

Over-leveraged – The company has been over-leveraged when compared to the competitors in the industry and needs to bring down the ratio of debt/total capital ratio.

(Weatherford, 2011).

5.5 Competitor Array:

Having done the competitor’s analysis, Competitors Array is also one of the important tools getting a better understanding about the competitors. It can be used for ranking the competitors with respect to industry success factors. To form competitor’s array we need to list the competitors, determine the key success factors (as shown in the Appendix 6), rank the key success factors by weighing them and then rate each competitor on each of the key success factor. Finally multiply the weight and rating and total it. Rank the companies from highest to lowest total. The ratings and the rankings of the various competitors are shown below. The ratings of each competitor have been given on a base of 10.

Methodology:

Below is the competitor array for Schlumberger and we have considered all the key factors that have been discussed in the Porter’s five forces model. We have not taken the key success factor for bargaining power of suppliers, as supplier information of the companies is not easily available. Instead we have considered Health and Safety as one of the key success factor.

Key Success Factors

Weighting

BHI

HAL

SLB

WFT

Technological Innovation

40%

28

24

36

20

Price of Equipment and Services

30%

18

27

21

15

Global Talent (Manpower)

20%

10

12

16

10

Health and Safety

10%

9

5

6

6

Total

100%

65

68

79

51

Ranking

 

3

2

1

4

Table 7: Competitor’s array of Schlumberger

Findings:

Global Talent (Manpower): In this Section, Schlumberger has been given a higher rating than the other competitors as the number of employees in this company is much higher in comparison to the other companies. The other companies have been rated based on the number of employees which were recorded at the end of the previous year.

Price of Equipment and Services: Halliburton has been given a higher rating than other as it has taken several initiatives last year which would help the company to increase manufacturing products in Eastern Hemisphere and restructure the service delivery platform to lower the delivery costs.

Technological Innovation: For this factor, Schlumberger has been rated the highest as the company had invested the maximum amount last year in their Research and Development activities. Thus more the spending on the R and D activities, more would be the development in the technological innovation. Baker Hughes has been given next higher rating as it has one of the largest Research and Development Centers and has a diverse product range.

Health and Safety: In health and safety, Baker Hughes has been awarded the highest rating as it provides its employees with the safest working environment according to Newsweek Green rankings (Baker Hughes, Annual Report, 2011). Schlumberger has been rated next as it has recorded the least number of fatalities last year after Baker Hughes and hopes to improve it in the forthcoming year. Halliburton has had issues with safety as well due to the BP Deepwater Horizon incident and it looks forward to improve on health and safety in the future course of time.

After analyzing all the key success factors and the competitors, we can see why Schlumberger is most successful enterprise as far as this industry is concerned.

5.6 A threat for Schlumberger:

Having known the strengths and weakness of the major players of this industry and also knowing that Schlumberger is having a competitive advantage over the other companies, especially in the Middle East, but the % increase in profits is less when compared with Halliburton. Taking the profit from Q2 -2010 and Q2 -2012

 

Q2-2012

Q2-2010

Increase in profit

% increase in profit

Schlumberger

12316

7927

4389

35.6

Halliburton

5445

2542

2903

53.3

Baker Hughes

4369

3005

1364

31.2

(Source: Company Annual Reports, 2009, 2010 and 2011)

Table 8: YTD revenue of Schlumberger’s competitors

The data from Weatherford wasn’t available as in their annual reports. Thus as we observe the YTD revenue data for the three companies, Schlumberger’s %increase in profit is just 35.6% when compared to Halliburton’s 53.3%. Thus it is important for the decision makers of Schlumberger to be aware of its shortcoming or identify it at the earliest and keep a close check on Halliburton strategies for expansion especially in the Middle East.

Chapter 6: Recommendations:

Having known that Schlumberger has been facing a threat from Halliburton where the %increase in revenue has been more and also Baker Hughes which is catching up with Schlumberger at a fast pace, Schlumberger should constantly keep a tab on its competitors in Middle East. Thus I would like to make the following recommendations to improve its business.

First, though the market share of the company in the Middle East is higher than its competitors, it may face vigorous competition from them in the near future. Thus the it is extremely crucial for the decision makers of the company to make use of its Business Intelligence Systems effectively. There is a high demand of competitiveness and moreover the company also needs to know effective ways to find huge amount of data and analyze them constantly. Thus the company should make use of Business Intelligence Systems which not only focus on Customer Relationship Management but also looks beyond at the wider business scenario like industry, products, market and competitor’s risks. Thus to have an effective competitor analysis it should:

Update the data warehouse of the Business Intelligence System constantly either bi-weekly or every month so as to know where the company is lacking and where it’s been facing a threat. The growth of the competitors is necessary for the company to measure its competitive advantage in the market.

There are different ways of amassing Business Intelligence; however Internet is the most powerful t

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