Schlumberger the behemoth

Behemoth and Leviathan, by William Blake

In an effort to cut costs oil companies are increasingly demanding that oilfield services players offer a full complement of services. The knock-on effect has been moves towards an oilfield services industry dominated by large, integrated players, which can offer oil companies a one-stop shop for all oilfield services needs. Indeed, the capability to see a project through from beginning to end is becoming a prerequisite for big contract awards. It is especially appreciated by state-oil companies, which are offering some of the most lucrative.

With this in mind Schlumberger (already the world’s largest services group by some distance) has moved to supplement its drilling services by bidding for Smith International. Schlumberger’s need to add drill bit and drilling fluid businesses to its portfolio makes Smith, a company it knows well, a neat fit.

For the sector it’s a gargantuan deal, the largest ever at US$11.2bn, and the second giant buyout bid in the past six months following Baker Hughes agreement to buy BJ Services for around US$6bn. If the two deals close the number of global integrated services firms will fall to four from six.

In the words of analysts at investment bank Morgan Stanley it leaves the industry “dominated by behemoth Schlumberger” – its 2009 revenues were greater than the combined sales of Halliburton and the merged Baker Hughes/BJ entity. Morgan Stanley, also points out that the proposed tie-up positions Schlumberger as the leading gas shale and deepwater services group, both high growth areas.

Will more deals follow? Attention will turn inevitably to Halliburton and Weatherford, another larger services player which now finds itself the smallest of the big four. Both are yet to make a sizable foray into the market and analysts have suggested the two may consider merging.

However, with the sector already highly concentrated already, deal activity is expected to focus instead on smaller services companies, which are now less able to compete in the world of the big four. Smith is a case in point. The deal answers awkward questions about how it was going to compete with the largest services groups. It is a question other mid-tier oilfield services companies must now be asking themselves.

But how positive is this re-organization? The net result is an increasingly concentrated sector dominated by four (possibly three) large, global services groups. The Houston Chronicle makes the point that an even more concentrated industry, with fewer players, will inevitably lead to few jobs (see Is energy merger the first domino?).

Though motivated, in part at least, by parochial concerns, the point is valid, especially in an industry struggling to replace an aging workforce. The oil industry is notoriously cyclical, consolidation might be the result of oil companies’ demands for cheaper services contracts in a period of low oil prices but if it leads to fewer jobs industry-wide the result is a recipe for future inflation.

Hydrogen vs EV, Round 5

At the very least, Suzuki’s Burgman Fuel Cell Scooter prototype (pictured) passes the embarrassment test: you wouldn’t feel like a fool tooling around the city on it, as you probably would in some electric vehicles like the Smart Car or a Toyota iQ, or certainly the old Sinclair C5 tricycle (remember them?).

Indeed, the bike is intended to look just like a conventional Suzuki Burgman and was developed with Intelligent Energy, a UK-based fuel cell developer, to address some other issues that have held back commercial deployment of fuel-cell vehicles — its makers claim a range of 350km, a re-fueling time of just a few minutes, as well as engine power comparable to its conventional stablemate.

It’s expected to be rolled out commercially sometime around 2015 as a realistic alternative to a standard combustion bike, and is designed to have mass appeal, specifically targeted for use in the urban environment by London’s commuters. The London prototype unveiling, with the backing of city authorities, also comes amid talk of a European Union move to crack down on motorbike emissions.

However, there are plenty of questions still to be answered and the impetus both in the EU and the USA heavily favours electric vehicles (EV) over hydrogen.

The initial price of the Suzuki Burgman fuel cell scooter will be relatively high — perhaps twice the current price tag of US$6,000 for a conventional bike — though that would fall if the bike found a large enough market. Bigger issues include the fragility of the engines, which can be highly susceptible to bumps and vibrations. Also, hydrogen is enormously expensive to store, and refuelling pumps are scarce.

The EV versus Fuel Cell debate hasn’t been in fuel cell’s favour recently, especially in the US, where Nobel Prize-winning Energy Secretary, Steven Chu, has come out forcefully against a viable future for the technology.

Intelligent Energy chief executive,  Henri Winaund, argues that it will be cheaper in the long run to develop a hydrogen fuel grid compared to electricity, as pumps can be built into existing petrol stations. EVs also face questions about infrastructure, such as the fact that many countries still produce most electricity from coal, the dirtiest fuel source, and grids would require huge upgrades to be able to cope with large-scale EV deployment.

For motorcycles, the lighter-weight fuel cell also has a distinct advantage over heavier EV battery alternatives. Several vehicle manufacturers, including GM, Honda and Toyota, have cited 2015 as the year that affordable hydrogen vehicles will start to come onto the market, and investment in infrastructure is picking up pace accordingly. Already, California has a nascent hydrogen network, with over 25 refueling stations; Germany has 30 and Sweden and Denmark are working to keep up with Norway, aiming to link up to create a Scandinavian highway. Japan is also investing heavily in infrastructure, hoping to have built up to 60 stations by 2015.

Now, encouraged by the Suzuki launch, London is scheduled to have at least six refueling points built in the run up to 2012, as well a fleet of fuel-cell taxis, buses and police cars planned for roll-out. By focusing on London’s commuters, the hope is that the practical case for developing a power grid for hydrogen is supported. Further backing in the UK came from energy minister Philip Hunt, who has laid out a £7m investment plan to fund a hydrogen highway along a stretch of motorway into Wales.

EVs are still favoured among policy-makers (See Cleaning up cars) and roll-out in the US and elsewhere is well-advanced. But Suzuki’s new scooter is a stylish ambassador for the hydrogen case.

Last weeks energy highlights

The EIU’s latest global coal outlook shows that Asia, mainly China, is pulling the industry out of 2009’s demand slump. Meanwhile in Europe, a proposed coal burning power plant in Mannheim, Germany has come under fire from environmental group WWF. Its legal challenge could have wider implications for other planned coal burning power plants in the EU.

 In Venezuela, drought has created an electricity shortage in the hydro-electric dependant country. This has compounded a lack of investment in the sector, leading to blackouts. It’s a situation that could potentially cause problems for Hugo Chavez as disquiet grows among the country’s poor. Pakistan too is struggling to manage its energy crisis, and has brought in a new Petroleum policy to tackle the situation.

Elsewhere, the EU has told the UN that it won’t be upping its CO2 reduction target from 20% to 30% following the recommendations of the Copenhagen summit, to the disappointment of green technology advocates. While in big oil, fourth-quarter results reporting season is underway. ConocoPhillips was first-up and its results reflected a company still paying the price for an ill timed investment in US refining and natural gas.