Service Cos Focus on Relationships with National Energy Firms

HOUSTON May 04, 2007 (Dow Jones Newswires)

Service companies are strengthening their ties with national energy champions as the balance of control over global reserves tilts away from the integrated majors.

At stake are revenue streams potentially worth billions of dollars. As oil-rich countries move to shrink the roles played by publicly traded multinationals in favor of national oil companies, or NOCs, their continued need for expertise and the latest technological advances could see them relying more on services companies, which have no designs for the crude-oil and natural-gas reserves they discover.

"Service companies must become national, or local," said Bernard Duroc-Danner, chief executive of Houston-based energy-services company Weatherford International Ltd. (WFT). "We have to get involved in the fabric of a society."

When integrated energy majors, such as Exxon Mobil Corp. (XOM) and Royal Dutch Shell PLC (RDSB.LN), are granted the status of operator for a project, they take on the responsibility of organizing the work and farming out contracts to companies like Weatherford. As countries increasingly look to their NOCs to take over operating control, service companies see an opportunity to step up their involvement. For example, instead of drilling according to specific instructions, service companies could advise the operators on where and how to drill wells.

Evidence of closer ties to the NOCs can be seen sector-wide, from Halliburton Co. (HAL) setting up a new headquarters in Dubai to Baker Hughes Inc. (BHI) Chief Executive Chad Deaton speaking of successful "Saudiization" on a recent conference call, where the company had increased the proportion of local workers on its Saudi Arabian projects to 60%. One measure of service companies' success in penetrating the fast-growing Siberian market is how many Russians they have hired.

The new "intimacy and breadth" in the relationship, as Duroc-Danner put it on a panel at the Offshore Technology Conference in Houston earlier this week, is paying off for both sides. Schlumberger Ltd. (SLB), the largest service company by market capitalization and the most geographically diverse, has notched seven straight quarters of record profits.

NOCs say they benefit as well, gaining technological expertise from service companies that have no claim of ownership on reserves.

Syanga Abilio, vice president of Sonangol, the Angolan oil company, called for an even greater degree of cooperation. He said service companies should sign onto the national oil companies' commitment to social and economic development.

"Why not have local entrepreneurs partner with the service companies?" he said, speaking on the same panel as Duroc-Danner.

The close partnership between NOCs and service companies is still in its early stages. Duroc-Danner said Weatherford's business with NOCs is growing faster than international oil companies, but from a smaller base. Like most of the largest services firms, Weatherford still derives more than 40% of its revenue from the U.S. and Canada, where international oil companies dominate.

Not so with the offshore drillers. Noble Corp. (NE) earns 60% of its revenue from NOCs and is angling for more, Chief Executive Mark Jackson said on the sidelines of the Offshore Technology Conference earlier this week. In one of the more dramatic illustrations of the tilt toward state-financed projects, the driller in 2005 and 2006 moved its shallow-water rigs, known as jackups, out of the U.S. Gulf of Mexico. Many found work in Mexican waters for state-owned Petroleos Mexicanos (PEM.YY), or Pemex.

"Our focus has been...to place our time and attention on NOCs," Jackson said.

Copyright (c) 2007 Dow Jones & Company, Inc.

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