Analysis: Oilfield Service Providers Seek to Restructure Businesses
Oilfield service (OFS) providers and equipment manufacturers are seeking to restructure their businesses to remain competitive amidst growing energy demand by emerging economies, the fallout from the Gulf of Mexico oil spill and the U.S. shale gas boom that's keeping natural gas prices and conventional gas drilling activity low, according to a recent report by Deloitte Consulting, How to Navigate the Uncertain Deepwaters, Corporate Restructuring With A Twist.
According to a recent report by Chuck Chakravarthy, director in Deloitte Consulting's oil and gas strategy practice, signs of restructuring were already appearing before the 2008 economic meltdown, largely due to higher growth rates in the Brazilian and West African deepwater markets, While deepwater activity has grown offshore Brazil and West Africa and in Asia and Australia, U.S. exploration activity has declined, with the U.S. share of the rig count falling from 44 percent in 2000 to 28 percent in 2009.
The recent boom in shale gas capital expenditures (CAPEX) in the U.S. and similar boom in oil sands activity in Canada has not been enough to compensate for the decline in upstream CAPEX in other areas. As a result, oilfield service providers have restructured their businesses in a variety of ways over the past decade, from changing their country of incorporation, including moving corporate headquarters outside the U.S., and establishing new manufacturing and research and development facilities in countries outside the U.S.
Deloitte's analysis of seven OFS companies' announcements of new manufacturing and research and development (R&D) facilities found that more than 70 percent of these new facilities were opened outside the U.S. "This is an indication that they are moving some of their sustainable R&D, sourcing, manufacturing, testing, and assembly to countries with possibly low cost of operations which coincidentally may also be where the market for their products & services have experienced growth," Deloitte said.
Given the downturn in activity following the Macondo oil spill and anticipation of more stringent environment, health and safety regulations for U.S. onshore operations as well as exploration efforts in the North Sea, companies will like seek to refresh their overall business strategy and operations.
While multi-national companies will have an easier time readjusting their portfolios, a shift could reveal mismatches in terms of their existing products and services and what is needed in growth markets; geography of markets versus where they are sourcing and manufacturing goods and services; overall landed cost of products and services versus competitors; and demand for certain technology and expertise in these markets versus what is available in the R&D pipeline.
"Companies should first consider which product and/or service lines will experience the highest and profitable growth and in what geographies," said Chakravarthy. Companies also need to consider the restructuring of their sales and delivery business, supply chain, research and development and support function systems. "Finally, service companies need to consider what it will take to capture a sizeable share of that growth – whether it's cost, service/product quality, delivery capability, technology, relationships, or all of the above," Chakravarthy noted.
According to Chakravarthy, the sales and delivery area also is primed for restructuring. Though the oil and gas business is considered local with differing local content requirements and various regulations that drive significant local presence for most companies, this does not mean that certain aspects cannot be standardized and shared across a region or sub-region.
"These may include steps in sales and delivery such as bid preparation, bid response, pricing strategy and standard price list for key items for the region, key contract components, key EHS considerations in service delivery, and best practices in drilling, completions, tie-ins and workover," he said. Benefits can be optimized pricing, service delivery quality consistency, and utilization of resources across borders.
The supply chain also is a good candidate for restructuring, especially since it extends across sourcing, manufacturing, assembly, packaging, testing, and delivery logistics. Benefits to sourcing key raw materials, components and equipment at a global and/or regional level from main suppliers can be achieved by separating the local sourcing requirement associated with local content rules from those that fall outside these rules.
"There can also be benefits from certain levels of centralization and/or regionalization of global logistics," said Chakravarthy, "and volume benefits can arise from consolidation of carriers, freight forwarders, customs brokers on a regional and/or global basis based on competency and expertise."
R&D can also be an attractive area for restructuring, Chakravarthy said, noting that sustainable R&D should be separated from new product development R&D to help decide the optimal location for various R&D categories from a quality and value perspective. A natural progression of such a strategy would be to consider contract R&D (as is common in the pharma/biotech industry) to further optimize a company's portfolio.
"In the oilfield equipment manufacturing business, it is not unusual for the "sustainable" R&D to be closely tied to manufacturing and hence move where the manufacturing gets located," said Chakravarthy. "This segmentation can also help decide what portion of the R&D budget can be centralized versus what can be pushed down to the business units."
While a certain level of local general and administration (G&A) support will always be required, there are a number of transaction types that can be centralized, including setting up "centers of excellence" for specialized input at first step towards a shared service type approach to certain G&A functions, some of which can eventually be outsourced, thus possibly converting a portion of fixed G&A costs into variable costs.
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