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Efficiency programsintroduced by a handful of E&P companies in 2013 have raised awareness of cost reductions in the upstream industry. This, together with the protracted weakness in commodity prices, has forced oilfield service suppliers to respond to the pricing pressure, resulting in several oilfield service alliances, joint ventures and mergers & acquisitions.
Reasons and motivation for alliances
Upon an initial inspection of Figure 1, we can mainly see four different types of consolidations. The first group concerns companies who wish to expand their offerings and improve operations, including GE Oil & Gas’ acquisition of Baker Hughes and Schlumberger’s takeover of Cameron. Secondly, we have seen a lot of movement in the subsea space motivated by integrated product offerings and leaner project executions. For example, there are many cases of M&A, JV and alliance activity among SPS providers and SURF players: Technip and FMC Technologies, Aker Solutions and Saipem, One Subsea and Subsea 7, GE Oil & Gas and Sapura Kencana, GE Oil & Gas and McDermott, and also the “one for all, all for one” collaboration between Aker BP, Subsea 7 and Aker Solutions. The third group includes collaborations between companies with similar product offerings with a strategy to improve their market shares and expand regional presence. Examples of this type include Wood Group’s takeover of AMECFW, Aker Solutions’ acquisition of the MMO player Reinertsen, and Subsea 7’s transaction of EMAS AMC. The last group represents engineering companies’ collaboration with installation contractors, for example McDermott and Petrofac, and KBR and Subsea 7.
Even though these consolidations were implicitly driven by the surge for efficiency improvement from E&P companies, we see that there are several other reasons for an increasing number of alliances, M&A and JV’s from the oilfield service industry point of view. Cost-savings in R&D of new technologies, leaner organizations, standardization of products and expanding offerings are some of the potential outcomes.
The new environment represents a potential risk for E&P companies
Setting aside the potential positive outcome for the service companies, E&P companies are in danger of being exposed to some risks when the supplier market is adapting towards an oligopolistic economic system. An industry concentration leads to higher market shares spread among a handful of players, which improves their bargaining power. This will especially be apparent if commodity prices start facing tailwinds. Further, this system will constrain the possibility for the oil & gas companies to mix and match suppliers. This effect will be even more prominent in regions with high involvement from the government, for instance in relation to local-content rules.
Status of OFS alliances
Table 1 represents a snapshot of major greenfield awards in 2016 – 2017, highlighting the E&P operator and the preferred service provider within each project.
For instance, in 2016, when Woodside awarded two big subsea projects, Greater Western Flank ph. 2 and Greater Enfield, it chose two different solutions, and neither of them were an alliance. For Greater Western Flank ph.2, Woodside went for a solution combining TechnipFMC for the SPS work, and McDermott and Subsea 7 for the pipeline system and subsea installation work, respectively. However, there are a signs that the E&P companies’ procurement patterns are changing towards longer-term partnerships and selection of alliances. Examples are BP’s awards to the Cameron & Subsea 7 alliance on both West Nile Delta ph. 2 and Mad dog ph.2 projects. Additionally, Aker BP seemed to embrace alliances when it released the news that Subsea 7 and Aker Solutions will be involved in work on all of its Norwegian subsea fields. This indicates that several oil and gas companies are welcoming the alliance structure in order to reduce costs and lead-times. This structure is believed to continue in a distressed commodity price environment. On the other hand, history tells us that alliances and joint ventures tend to fall apart when oil prices rebound and companies are not dependent on synergies to maneuver through the downturn.
RYSTAD ENERGY ANNUAL OIL & GAS SUMMITS 2017
Rystad Energy has the great pleasure of inviting you to our Annual Oil & Gas Summits 2017. This year our key events will take place in Houston and London. Join us to hear about our up-to-date market analyses and overview, industry perspectives and data analysis discussions.
September 19-20, 2017 Houston, United States
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