October 2017

The market concentration evolution for oilfield service companies

Oilfield Service Solutions

Product webinar

Speaker: Jo Friedmann, 
Analyst

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RYSTAD ENERGY PRODUCT HIGHLIGHTS

Oilfield Service Databases

• DCube (Demand Database): Field-by-field coverage for the global oilfield service companies and their spending

The October version of DCube shows the impact of the downward revision of our base case oil price scenario on the service market

• SCube (Supplier Database): Detailed insights into revenues and contracts of the largest oilfield service companies

In the latest SCube version you can find that service companies revenues had grown 6.5% on average in Q2 2017

• RigCube (Rig Supply & Demand Database): Insights into historical and forecasted global rig supply and demand

RigCube is now updated continuously and in line with events in the Rig market

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Mergers and acquisitions in the oilfield service space have been the main topic in 2017. However, the question is how much stronger OFS companies became against the E&P operators. It is clear that some suppliers have increased their control of their markets, but E&P companies have done so too.

One method to define market concentration within an oilfield service segment is to look at the Herfindahl-Hirschman Index (HHI) among the suppliers and their customers. The HHI is calculated as a sum of the squared market shares for all of the companies in the market segment. The result is a number from close to zero to 10,000, where 10,000 represents an absolute monopoly in the market and close to zero represents perfect competition with thousands of equally-sized companies. Figure 1 plots the market concentration in 2013 and 2017 for oilfield service suppliers and E&P companies within each specific service segment. It is clear that almost all of the market segments have seen growth in concentration and market power over the recent years.

The most competitive market segment is Maintenance, Modification and Operations (MMO). It consists of thousands of local service companies performing work for thousands of operators. There have been some noticeable M&A activity within the MMO market segment with Wood Group acquiring AMECFW and Aker Solutions acquiring Reinertsen. On a global scale this did not make much of an impact on the market concentration, although in the North Sea it raised antitrust concerns.

The Engineering as well as the Fabrication & Installation market segments have a low market concentration as well, but there is a trend of growing concentration in this space. First of all, fewer and fewer E&P companies have sanctioned EPC projects during the downturn. Those that actually did it, sanctioned many or large projects. This caused increased concentration of EPC contract owners. Service companies also have increased their concentration as a few market players have been successful in gaining market share, like the Korean EPC yards with mega-awards such as Prelude and Egina for Samsung Heavy Industries, QUAD2014 and Clair Ridge for Hyundai Heavy Industries and Ichthys and Mariner for Daewoo.

The subsea market (SURF and SPS) is the most concentrated market segment where the top 10 E&P operators control 70% of the market. The concentration has been growing over the recent years as only a few companies have sanctioned projects. Eni has been one of the most dominating operators in the subsea market this year with awards at Coral FLNG and Zohr. Subsea services suppliers have also increased their dominance with the merger of Technip and FMC, as well as Subsea7 picking up the remains after the EMAS Chiyoda Subsea bankruptcy.

Another segment to highlight is offshore vessels (AHTS and PSV) which became stronger relative to the E&P operators. With the merger of Solstad-REM-Farstad-Deep Sea Supply, a clear growth in market concentration is occurring in this segment.

In the North American market, we have seen pressure pumpers and land-rig owners strengthen their positions considerably through M&A. For example, we have seen M&A activity by Keane and Patterson-UTI; Schlumberger-Weatherford alliance, as well as Halliburton have taken market shares within pressure pumping from Baker Hughes. Pressure pumpers have increased their market concentration by more than 250 points, reaching 1500. Which is, according to the HHI index, a moderately concentrated marketplace which should be monitored further to prevent antitrust concerns.

In general, oilfield service suppliers have improved their market power over the recent years. However, to see the effect of this on increasing pricing power, more E&P companies need to grow investments and go back to the service market and award contracts. Combined with more inevitable M&A activity among suppliers, the outlook for service companies looks promising as they can influence their pricing targets yet again.