Analysis: Sent a thank-you note to your well servicing contractor lately?
You should. The nation's well service contractors have toiled quietly behind the scenes to revamp their industry. Despite a tough pricing environment, contractors continue to upgrade equipment, expand the range of services they provide customers, and pursue human resource policies that increase safety and open career paths for young people in an industry where as many as 50 percent of employees will reach retirement age within a decade.
While operators benefit from strong commodity pricing, those benefits are leveraged off the increased production provided through the well service rig.
As an industry, well servicing has undergone dramatic change in the last decade. Ten years ago, well servicing was the most fragmented of oil service industries. There were three, four, or more small fleet contractors in every oilpatch community. Energy prices were low and competition among contractors made business brutally tough.
Operators had few qualms about exploiting the situation. Facing their own challenges on reducing costs in the 1990s, the E&P community leaned on well service contractors to reduce rig rates and accept greater liability.
The results of that imbalance were predictable. Contractors went out of business. Wages stayed flat or declined while an expanding economy attracted oilfield workers to better paying indoor jobs. Reinvestment in the industry was virtually nonexistent.
Fleet attrition occurred each year in sizable chunks. Between 1985 and 2001, more than 5,000 well service rigs disappeared from the domestic fleet. The industry was literally rusting away before everyone's eyes.
During the late 1990s, a wave of consolidation swept the well service industry in the face of mounting cost pressures. The end result is that well servicing today is the most concentrated of oil service industries outside the pressure pumping business.
Three contractors represent between 70 and 75 percent of the domestic U.S. rig fleet. Indeed, the norm today is two contractors per community--one large and one small. The first is one of the big three well servicing firms: Key Energy Services, Inc.; Pool Well Services Co., a division of Nabors Industries Ltd.; or Basic Energy Services. The other contractor is a local company which has a handful of rigs, some fluids-hauling trucks, or other wellsite equipment.
The smaller company competes on the basis of service, relationship, price, and diversification. The larger company competes on the basis of a broad array of services delivered through one company.
The larger well service company typically will have long-standing arrangements with the bigger E&P firms, while the smaller company is the first choice for smaller E&P firms that need something done as soon as possible.
The service industry today is being re-energized by improved business conditions. Rig hours continue to rise at roughly three percent per quarter. The industry has seen some increase in pricing. Hourly rates are up about 10 percent since the first of the year. But it is important to remember that the well service industry missed the large jump in rig rates the drilling industry participated in during the 2001 drilling boom, and is just now reaching a point at which wages have improved and some reinvestment in equipment is underway.
There have been 75 new rigs added to the industry over the last decade, but rig rates remain low and payout on new equipment is often a decade or more away. The major emphasis currently is on rig refurbishment, which can be done for a quarter of a million dollars or so per unit.
Simultaneously, the industry's trade group, the Association of Energy Service Companies, has taken a leading role as a facilitator for problem-solving in the industry. In 1996, the AESC broadened its member base to include all wellsite services and vendors and now serves, at both the local chapter and the national levels, as a forum within which contractors, vendors, and customers can interact in a way that identifies best practices for overcoming some of the challenges that beleaguer the industry.
As a result, the industry can point to measurable progress in safety performance, an expanded library of training materials, and uniformity in developing best practices.
In addition, the well servicing industry is on the verge of further change over the next few years. There are two evolving trends. The first of these is the internationalization of well service work.
Where the U.S. is now, other regions of the globe will follow as reservoirs move from flush production to the pump, and eventually transition into enhanced recovery. Each of those processes requires well intervention on a continual basis. That evolution has already taken hold in Latin America. Meanwhile, flush production in some of the world's most prolific reservoirs in the Middle East is beginning to decline, which will lead to increased well intervention over the next few years. Indeed, that process is already well underway in the former Soviet Union and parts of Africa.
What this means, essentially, is that global demand will grow for U.S.-style wellsite services. And this focuses attention on the U.S. well servicing model.
Right now in the U.S., a drilling rig bores the initial well then moves off to another job. Enter the well service rig with its lower cost structure. The rig serves as a platform for completions initially. But all subsequent work on the well--whether it is routine maintenance to clean the well each year or workovers to open additional formations for hydrocarbon exploitation a half-decade later--are done by the well service rig. Eventually the well service rig plugs the well when it is no longer economically viable.
In between these events, well service contractors haul away fluids, provide trucking services, or market additional services through fishing and tool rentals.
Internationally, the model is different. The drilling rig is often involved in completions and workovers. As global reservoirs move past flush production, interest is expanding in the U.S. well service model. Apache Corporation has contracted five well service rigs through Key Energy Services on a pilot program for U.S.-style well services in Egypt. In fact, Key Energy Services reports a growing volume of inquiries regarding overseas rig deployment for domestic well service rigs. The inquiries come from national oil companies as well as multinational oil firms.
In Russia, several large production companies are looking at divesting their service divisions, which may provide an entree for U.S-based contractors. Both Key Energy Services and Nabors Industries have been involved in discussions at various levels over possible acquisition or joint venture opportunities involving the service divisions of large Russian oil companies such as LUKOIL.
The second trend involves the well service rig as an information platform. A combination of improved sensors, onboard computers, and wireless or satellite communications will eventually transmit data in real time on what is occurring during interventions at the wellsite to the desktops of customers in faraway offices.
Key Energy Services, the world's largest service contractor, is completing the final stages of a pilot program to accomplish that very thing and plans to roll out its KeyView system during fourth quarter 2003. The company has plans to deploy the system on as many as 300 rigs in 2004.
Pool Well Services, the world's second largest service contractor, is not far behind. The company is also working on rival technology that enables a well service rig to serve as an information platform for customers.
Domestically, conditions have improved for the well service contractor. Those improvements appear sustainable. While that is good news, one can also argue that globalization and technology will be the pathways to a well servicing renaissance.
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