See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/301486126

Financial Impact of Price Volatility on the Oilfield Services Sector of the

Petroleum Industry

Conference Paper · May 2016

DOI: 10.2118/179962-MS

CITATIONS READS
11 1,688

1 author:

Andreas Michael
University of North Dakota
57 PUBLICATIONS 223 CITATIONS

SEE PROFILE

All content following this page was uploaded by Andreas Michael on 09 August 2022.

The user has requested enhancement of the downloaded file.

SPE-179962-MS

Financial Impact of Price Volatility on the Oilfield Services Sector of the

Petroleum Industry
Andreas Michael, The University of Texas at Austin

Copyright 2016, Society of Petroleum Engineers

This paper was prepared for presentation at the SPE/IAEE Hydrocarbon Economics and Evaluation Symposium held in Houston, Texas, USA, 17–18 May 2016.

This paper was selected for presentation by an SPE program committee following review of information contained in an abstract submitted by the author(s). Contents
of the paper have not been reviewed by the Society of Petroleum Engineers and are subject to correction by the author(s). The material does not necessarily reflect
any position of the Society of Petroleum Engineers, its officers, or members. Electronic reproduction, distribution, or storage of any part of this paper without the written
consent of the Society of Petroleum Engineers is prohibited. Permission to reproduce in print is restricted to an abstract of not more than 300 words; illustrations may
not be copied. The abstract must contain conspicuous acknowledgment of SPE copyright.

Abstract
Historically, oilfield services companies seemed to be financially more sensitive to crude oil price
volatility compared to companies doing exploration and production. This was evident both in times of
rising and falling price, imposing serious challenges to them. The year 2014 marked, after a 40 percent
drop in the price of oil, the agreement for one of the largest acquisitions in the industry between two of
the biggest international oilfield service providers; that of Baker Hughes, Inc. by Halliburton Co. The
implications of these price fluctuations significantly influence this sector of the industry shaping the
narrative around it.
This paper evaluates the extent to which crude oil price variations affect the service companies in the
stock market compared to exploration and production (E&P) companies. Regression analysis is performed
on two sample groups; one consisting of service companies and the other of E&Ps. Daily data from the
beginning of 1986 until early 2015 is used for both stock and crude oil prices. When compared to the
E&Ps group, the service companies group is more oil price sensitive throughout the whole period by a
factor of almost six and a half. In particular, from 1986 to 2007 this factor is 6.3. For the post 2008 period,
a reverse causality effect is observed for both groups with changes in the oil price, with the service
companies group slightly less sensitive, yielding a factor of 0.9.
The factors responsible for the observed phenomena are evaluated, backed with data analysis. The
higher economic limits of unconventional compared to conventional energy resources, make the service
companies specializing in unconventional play development struggle as these are the first to become
uneconomic in times of falling price. The downstream operations most E&Ps have unlike service
providers, enables them to buffer losses in their upstream sectors when price drops and vice versa. Also,
the decreasing dependence of the E&Ps on service companies as they grow bigger makes the latter less
adroit to price variations than the former. Finally, the rise of the national oil companies in recent decades
in terms of production and reserves control, has led to additional competition against service companies
by international oil companies for providing specialized technical assistance.
Introduction
Oilfield service companies comprise, without a doubt a major segment of the petroleum industry. These
are the corporations providing assistance in the form of services to the exploration and production (E&P)
2 SPE-179962-MS

companies, which produce the oil and gas. These services range from seismic and geological surveys, to
transportation and directional drilling. Acting as the industry’s workhorses, they tend to be less well
known than the oil producing firms that hire them, but have enjoyed several lucrative periods of time since
the 1980s.
In this study, a comparison is made between three of the biggest service companies and three oil and
gas producing supermajors. Although, stock price cannot be a complete indicator of a corporations’
industrial performance, in this evaluation is considered to be as such. The corporations’ stock price
variations as a function of the crude oil price (West Texas Intermediate) fluctuations are evaluated. The
inflationary effects are assumed to be the same for the six corporations and the oil price and are therefore
neglected. Also, the price of natural gas is not considered as a parameter in the assessment. Regression
analysis is used to determine the extent to which the WTI price parameter influences the corporations’
stock prices.
This paper provides the basis for understanding the forces shaping the financial performance of oilfield
services companies and the highlights core differences with the corporations in the exploration and
production sector of the industry. Additionally, it delivers reasoning behind behavior seen from service
companies during the ups and downs in the crude oil price.

Description of the corporations involved in the study

This section provides a brief description of the six corporations comprising the two groups taking part in
the analysis. Background information is taken from the corporations’ official websites and financial
information on stock price history and market capitalization (market cap) is taken from Yahoo Finance
Canada (see reference section).

Service companies group

These are corporations providing services to the exploration and production (upstream) sector of the
industry. They typically do not produce oil and gas themselves, but provide the equipment, infrastructure,
intellectual property and technical services assisting the extraction and transportation to the refinery of
these energy resources.
Schlumberger, Ltd Founded in 1926 in France by brothers Marcel and Conrad Schlumberger and
headquartered in Houston, Texas since 1940. Schlumberger currently stands as the largest oilfield services
provider, indispensable to the industry worldwide. Throughout the years, many ground-breaking oilfield
technologies were invented by Schlumberger employees. At the time of this study, its market cap is about
$107 billion.
Halliburton, Co. Erle P. Halliburton started his oil well cementing business in 1919 in Duncan,
Oklahoma which now has headquarters in Dubai, UAE. It specializes in production enhancement by
reservoir stimulation, cementing, coiled-tubing and software services. It has six technology centers around
the globe and its current market cap is estimated at $36.4 billion.
Baker Hughes, Inc. This company was founded in April 1987 through the acquisition of Hughes Tool
Company by Baker International. Today it specializes in drilling, formation evaluation and production
services. In November 2014 it was announced that a takeover deal with Halliburton of $34.6 billion will
be proposed to the shareholders. The company’s current market cap is about $27 billion.

E&Ps group
Unlike most service companies, ⬙E&Ps⬙ are business entities that explore, produce, transport and refine
oil and gas found in reservoirs, usually many feet below the surface. The top five or six largest publicly
SPE-179962-MS 3

owned producing companies have been traditionally referred to as ⬙supermajors⬙. Three such companies
are chosen for comparison purposes with the oilfield service providers.
Chevron Corporation One of the successors of John D. Rockefeller’s Standard Oil Company,
headquartered in San Ramon, California. A multinational business, named Chevron after the merger
between SoCal and Gulf Oil in 1984, has operations in 180 countries worldwide and is engaged in
every aspect of the industry from exploration to power generation. Chevron’s market cap is currently
at $201 billion.
Royal Dutch Shell Plc An Anglo Dutch multinational whose roots can be traced back to the 19th
century. With headquarters in The Hague, Netherlands, it is active in every aspect of the industry. Its
market cap is estimated at $211 billion. Although it has two ticker symbols in the NYSE, for this study
the stock price of only RDS.B is used due to its lengthier data history compared to RDS.A. The only
difference is that the Class B shares come with a dividend access mechanism that does not withhold a 15
percent Dutch tax, as the Class A does.
BP Plc Formerly known as British Petroleum, BP is a vertically integrated oil and gas company. With
headquarters in London, England it operates in about 80 countries. The Deepwater Horizon oil spill in the
Gulf of Mexico in April 2010 initiated many changes to the company. One such was a $38 billion
divestment to raise funds for the liabilities related to the accident and the introduction of the company’s
first American CEO. Currently, its market cap is about $127 billion.

History of the prices of crude oil and natural gas for 1986-2015
This section provides a brief account of the trends the prices of oil and gas followed during the time period
this study assesses and also explains the undertaken assumptions.

Geopolitical events affecting the oil and gas prices and their BTU-price disparity
From 1986 until 1996 the prices of crude oil and natural gas were mostly steady with the latter following
the trends of the former. The 1990-1991 Gulf War (Iraqi invasion of Kuwait) did not have a long-term
impact on oil and gas prices. In March 1999, the members of the Organization of Petroleum Exporting
Countries (OPEC) agreed to cut production through export limitations to revive the price, ending a price
drop going on since 1997 due to expanding production. Two years later, the September 2001 terrorist
attacks led to the US war in Afghanistan. This instability in the global economy strengthened with the
2003 invasion of Iraq, with the prices trending upwards. The WTI peaked at world record price in July
2008, before the financial crisis contributed to its decline by more than 70 percent by December of that
same year.
During all this time, the natural gas price kept following that of oil, deviating just marginally from time
to time. However, after April 2009 the natural gas price kept going down, while that of oil kept rising
generating an increasing ⬙BTU disparity⬙ in terms of price between the two commodities (Michael, 2014).
The WTI price is officially reported in U.S. dollars per barrel. A barrel of oil is roughly equivalent to six
million BTU (Economides et al., 2000). Natural gas prices are reported dissimilarly to those of oil, in U.S.
dollars per million BTU. Figure 1 shows the two commodity prices, both in terms of energy content. This
BTU-price disparity which began in 2009 peaks at a point in 2013, before the 2014 oil price decline makes
it vanish, with oil and gas costing roughly the same per million BTU.
4 SPE-179962-MS

Figure 1—Data for 1986-2015 taken from the U.S. EIA and adjusted to $/MMBTU units.

Assumptions on the effects of natural gas price and inflation

In this study for simplicity purposes, only the crude oil price is used. The higher complexity and lower
profitability of natural gas-oriented projects gives them higher risks compared to liquid oil-oriented ones.
So, the primary focus of the vast majority of the E&Ps is kept fixed on liquid-rich resources. This justifies
the hypothesis that the effect the price of natural gas imposes on the petroleum industry is in general very
small, compared to the much heavier effect of the price of crude oil.
In addition, the effect of inflation; the reduction of the purchasing power of money with time, is
similarly assumed to be zero for this study. This is a very serious assumption given the effects high levels
of inflation, or deflation, can have on an economy. For example, as the famous Phillips curve indicates,
high inflation reduces unemployment at least in the short-run, and vice versa (Phillips, 1958). This
increases demand for oil as households have more disposable income, pushing the price upwards as well.
It can also be argued that the oil price can create inflation, affecting the costs of heating oil, aviation fuels,
chemicals, plastics and other.
However, for simplicity purposes again, it is assumed that the stock prices are influenced by
inflationary forces in the same proportion and direction as the oil price. Therefore, if the effects on each
of the two parameters examined are equivalent, they cancel each other out neutralizing the net effect
played by inflation on the overall assessment.

Comparison of stock market sensitivity to crude oil price

The stock price of a corporation has always been, bar none, a solid indicator of its overall performance
in the markets. The stock prices of the three big internationally-operating corporations comprising the
service companies group (Schlumberger, Halliburton and Baker Hughes) are plotted against time from the
beginning of 1986, until February 2015. On the same plot the price of crude oil (WTI) is plotted for the
same time period. The data for the WTI price is taken from the U.S. Energy Information Agency (EIA)
website (see reference section). The same thing is done for the E&Ps group consisting of three
multinationals regarded as ⬙supermajors⬙; Chevron, Royal Dutch Shell and BP (see Figures 2 and 3).
SPE-179962-MS 5

Figure 2—From the beginning of 1986 until the beginning of 2015.

Figure 3—From the beginning of 1986 until the beginning of 2015.

In both plots, the stock prices of the corporations fluctuate violently as does the oil price. There seems
to be no easily distinguishable trends evident. Looking closely in the years from 2008 onwards (see
Figures 4 and 5); it becomes apparent that starting from 2010, the stock prices of the E&Ps become more
stable compared to those of the service companies.
6 SPE-179962-MS

Figure 4 —From the beginning of 2008 until the beginning of 2015.

Figure 5—From the beginning of 2008 until the beginning of 2015.

Additionally, for a more mathematically reliable proof of the trends shown by plots, a regression
analysis is carried out using Microsoft Excel. A total of six different sub-analyses are performed for the
service companies and E&Ps groups for three different time periods each. The results for the stock price
sensitivity per dollar change in the price of WTI are tabulated on Table 1 and they are consistent with the
trends recognized when ⬙eyeballing⬙ the plots. Screenshots of the full results summary for each analysis
are in the appendix, (note the extremely low P-values highlighting the reliability of the generated results).
SPE-179962-MS 7

Since the stock price range for the six corporations is different, a scaling bias would be generated if the
raw magnitudes of the oil/stock price fluctuations are used for the input data. Thus, the percentage changes
of the variations, along with their direction (positive or negative) were used.

Table 1—Change in the stock price per dollar change in the price of crude oil (WTI) given by the regression analyses.

The primary parameter of focus in this analysis is the (regression) coefficients, quantifying the causal
effect of the oil price (regressor) variation on the corporations’ stock price. Secondarily, the value of
R-squared provides an indication of how well the data values are fitted on the regression line. In this study,
high(er) coefficient and R-squared values suggest a (more) vigorous relationship between the oil price and
the stock value for the corresponding group. To aid the comparison, service companies-to-E&Ps ratios for
both parameters are calculated; values of these ratios over one, show ⬙stronger⬙ and more ⬙closely-fitted⬙
relationship between the oil price and the service companies group, compared to the E&Ps (see Table 1).
Nevertheless, this does not apply when the coefficients are negative, denoting retrocausality; an increase
in the price of oil causing a drop in the price of the stocks.
For some cases (mainly for the E&Ps group) the R-squared values become significantly low. This is
not destroying the results of the analysis, as the hypothesis of this case study is dealing with a comparison
between the two groups. However, it has to be noted that addition of more variables (regressors) can only
improve R-squared values (see Bedeian et al., 1994 for a parallel issue to this problem). Other variables
that also correlate with stock price of corporations in the industry and could be used to yield higher
R-squared are oil production and rig count.
Interestingly, the coefficients of both groups for the 2008 to 2015 period are negative, with that of the
E&Ps slightly higher. It follows that there had been a change in the industry after the major oil price
collapse of 2008 that reformed the E&P-service company dynamic as well. This is most likely related to
the development of unconventional resources, oil and gas from shale in particular. Advances in technol-
ogy such as horizontal drilling and hydraulic fracturing made this possible and service companies’
contribution in that has been massive. The wide-ranging shift of the oil and gas industry towards the
exploitation of shale resources became known as the ⬙shale revolution⬙ and had implications in the ways
in which both service companies and E&Ps do business. Nevertheless, the shale revolution, despite its
game-changing role, should not be seen as the sole reason as to why, or why not, the service companies
group has overall been affected by oil price more intensely than the E&Ps group in the last three decades.
Despite the ambiguous and inconclusive coefficients for the 2008 to 2015 period, the trends for the
whole time period (1986-2015) are clear and unquestionable, displaying the service companies group as
8 SPE-179962-MS

roughly six and half times more financially sensitive to oil price changes compared to the E&Ps group.
The following section addresses four major dominating factors contributing to that.
Factors explaining the heavy influence of oil price on service companies
There are a number of factors of varying significance explaining why service companies are affected by
the price volatility of crude oil more than the E&Ps, as it is displayed by the regression analysis results.
The most important ones are described in the following text.
Unconventional plays have higher limiting economic prices than conventional plays
As it was previously mentioned, the development of unconventional resources like tight (low permeability)
shale formations requires the application of cutting edge technology. For example, horizontal wells with
multiple fractures, which increase the surface area of the hydrocarbon-bearing formation that is exposed to the
well. R&D departments of major service companies specialize in the development of such technologies.
For example, in 2010 Schlumberger developed the HiWAY flow-channel hydraulic fracturing tech-
nique. This technique creates channels of infinite conductivity within the fracture. This has helped
operators increase production, while using less water and proppant (Gillard et al., 2010). According to
Schlumberger’s website, this technique has been adopted by more than 100 oil and gas producers in more
than 20 countries. HiWAY technology found particular success in the Eagle Ford shale formation in South
Texas. Petrohawk Energy Corporation, an independent E&P with operations in this formation claims,
through a case study made by Schlumberger, that after utilizing this technology, its oil and gas production
increased by 32 and 37 percent respectively (see reference section).
However, what determines the economic feasibility of such ground-breaking technologies is simply the
price at which the produced resources are traded. No profits will be generated from any resource play if
the oil and gas prices fall below a certain threshold. This price threshold, known as the breakeven price,
has a tendency to be higher for unconventional resources as opposed to conventional ones. This means that
as the price falls, as it happened in the latter half of 2014, the first projects that become uneconomic are
those involving the development of unconventional resources like the Athabasca oil sands (natural
bitumen reserves) in Alberta, Canada (see Figure 6).

Figure 6 —This map shows the extent of the oil sands in Alberta, Canada (Source: NormanEinstein).
SPE-179962-MS 9

As development-associated costs vary from one location to another, the break-even prices vary
accordingly. They are a function of exploration and production, oil well development, transportation,
selling, and general administration costs. Figure 7 shows the break-even prices for various shale plays in
the United States, taken from the Credit Suisse Group. It shows break-even prices varying from play to
play from about $24 to $84 per barrel. Clearly, the higher the crude oil price is from these projects
break-even prices, the more profitable these projects become. If the oil price is near the break-even price
of the project, the production begins to slow down and decline in the long-run, which will eventually end
up pushing the oil price back up due to low supply.

Figure 7—Average break-even oil prices for various U.S. shale projects (Data source: Credit Suisse, 2014). The red bar indicates the
U.S. average break-even price for non-shale projects (Data source: Financial Times, 2014). Most of the shale play projects are more
expensive than the non-shale play ones.

Furthermore, the red bar in Figure 7 designates the U.S. average break-even oil price, excluding
production from shale. This is taken from a Financial Times graphic to be about $50/bbl (Raval, 2014).
While this $50/bbl average definitely incorporates production from unconventional resources other than
shale, such as tight gas sandstone and coalbed methane, it can still be used as a generic indicator of
production from conventional plays. The majority of the U.S. production from shale basins exhibits
break-even costs higher than the average break-even cost from non-shale production. Evidently, produc-
tion from shale is generally more expensive than that from non-shale formations.
The implication of this is that the operators tend to focus more on exploitation of the ⬙simpler and
easier⬙ conventional reserves in times of dropping prices. This relaxes the demand for the services
associated with the production from unconventional reserves, such as the Schlumberger’s HiWAY
technology mentioned previously, affecting negatively the service companies’ cash flows.
10 SPE-179962-MS

The 2014 steep price drop has forced Schlumberger to announce the layoff of 9,000 employees.
Similarly, Halliburton announced the layoff of 6.5 to 8 percent of its workforce which translates to
5,000 to 6,500 employees. Baker Hughes in its turn announced the layoff of 7,000 workers because
of the fallen prices. The actions of Halliburton and Baker Hughes are suspected of also having to do
with the (currently) pending acquisition of the latter by the former, as they have to pass antitrust
review by the Department of Justice. The E&Ps were not drastically affected with Chevron, BP and
Shell’s layoffs staying in the hundreds with 162, 555 and 600 employees respectively (Helman,
2015).
In reverse, when the prices are favorable and the development of unconventional resources is feasible
economically, the rig count goes up and service companies can enjoy an enormous demand for their
activities. There are times the oil price is so high that service providers have to make waitlists of the E&Ps
requesting their services in certain highly active regions.

Service companies normally unlike E&Ps, do not have downstream operations

John D. Rockefeller is the man who is credited with the creation of the first vertically integrated petroleum
company. His Standard Oil enhanced its control over the industry by expanding beyond its downstream
refining business to almost all stages of oil production. This was realized by acquiring pipelines, railroad
tanks, barrel manufacturing facilities and other smaller businesses. In 1882, a new corporate arrangement
was made where the stockholders of every company belonging to the Standard Oil’s group transferred
their interest to a single entity controlling all those companies creating the Standard Oil Trust (Yergin,
1991).
The trust model enabled Standard Oil to work as a well-organized monopoly. This was the case until
the Sherman Antitrust Act was passed by the Congress in 1890 causing the breaking of the Trust.
Eventually, the U.S. Supreme Court ordered Standard Oil’s dissolution into more than 30 separate
vertically integrated companies in May 1911. One of those, Standard Oil of California eventually became
what is today Chevron Corporation (Yergin, 1991).
Of the many E&Ps it is the case that some of the bigger of those tend to operate in the downstream
sector of the industry as well as the upstream. In downstream, the crude oil feedstock is converted
to a variety of products such as motor lubricants, resins and many other specialty chemicals. This can
provide an alternative source of revenue for the E&Ps, diversifying their risk across more industry
segments.
Additionally, since petroleum is used as feedstock, a decline in its price will decrease the petrochemical
subsidiary’s costs hence leading to higher profits. These higher profits can balance out the lower profits
made from the produced crude’s sales made by the upstream segment of the corporation. The opposite
may take place in periods of high oil prices when gains in the upstream sector from the sales support the
increased costs of petrochemical feedstock in the downstream. This enables the vertically integrated
corporation to survive price extremes.
For example, in July of 2000 Phillips Petroleum Company jointly founded with Chevron a petrochem-
ical company called Chevron Phillips Chemical Company, LLC. A 50/50 venture, that would manufacture
and market a wide range of petrochemicals at its manufacturing facilities located in Belgium, China,
Colombia, Qatar, Saudi Arabia, Singapore, South Korea and the United States, according to the compa-
ny’s website (see reference section).
Fourteen years later when the oil price collapsed, Chevron Phillips acted as a buffer for its more
upstream-oriented parent company. Despite Chevron’s 2014 third quarter upstream production
decline of 0.7 percent, (year-over-year) refineries benefiting by the oversupply associated with the
lower price, gave rise to gains of 340 percent in Chevron’s downstream earnings. This is the result
of oil exporting countries like Saudi Arabia looking for buyers everywhere offering benchmark price
SPE-179962-MS 11

discounts to avoid market share losses (Trefis Team, 2014). If Chevron had not entered the joint
venture with Phillips, it would have had a much tougher time surviving the price drop and its
powerful effects in the upstream sector.
Mobil is another good example. Before its merger with Exxon to form ExxonMobil in 1999, Mobil
Corporation was a large vertically integrated company consisting of three large sectors: exploration and
production, marketing and refining and chemicals. The competing markets for crude oil provided a barrier
between the operating strategies of the two former sectors. Each sector was operating largely indepen-
dently without an apparent unifying strategy across them. In fact, each sector in a specific geographic
region developed and implemented its own strategy, customized by the local conditions. This allowed
Mobil to exploit (vertical and horizontal) integration opportunities across its worldwide operations
(Kaplan & Norton, 2001).
According to Moody’s Investors Service, the projected 2015 earnings before interest, taxes, depreci-
ation and amortization (EBITDA) for the integrated oil and gas industry did not change from its 2014
levels, while its rating went from positive to stable. That is led by lower oil prices improving downstream
results, where U.S. refiners get to benefit from discounted feedstock and lower energy costs.
The 2014 acquisition of Baker Hughes by Halliburton is not an example of vertical integration. It is
a case of intra-industrial horizontal integration where one competitor takes over another. A deal made to
enable the two rivals to form a bigger single corporation to survive the fallen oil prices, allowing them
to compete more effectively with Schlumberger, the long-time leader in oilfield services industry.

The need for service providers decreases as the oil E&Ps grow bigger
Most of the biggest oil and gas producing companies have their own R&D departments where they test
various innovative new methods geared towards the enhancement of production and cost efficiency. This
makes them less dependent on service companies for the aforementioned, and provides a solid source of
development within the company utilizing its own talent. As a result, the service companies are left
unstable and more liable to price ups and downs effects relative to the E&Ps.
For instance, Shell has five research facilities worldwide. The Shell Technology Center Houston
(STCH) in Houston, Texas consists of 44 buildings over an area of 200 acres, housing six of the eleven
Shell Chief Scientists who perform cutting edge research in almost all phases of the company’s operations
from 4D seismic to heavy oil and oil shale unconventional hydrocarbon resources production (see
reference section). Shell is in that way relieved from the need to fund service companies to conduct studies
in those disciplines.
The expenditure on R&D by the members of the E&Ps group has been consistently high in the last
years, competing with the service companies’ group members. Figure 8a shows a graphic of the annual
R&D expenditure for the six corporations from 2010 until 2014, while Figure 8b is a chart of the average
value for each corporation for the same time period. The data for the spending of each corporation came
from www.marketwatch.com.
12 SPE-179962-MS

Figure 8a—Annual spending on R&D by the six corporations of the study for the 2010-2014 period (Data source:
www.marketwatch.com).

Figure 8b—Average annual R&D spending by the six corporations for the 2010-2014 period.

All three service companies are on the rise during this period with a consistent increase in their
expenditure. Despite the rise, however Halliburton and Baker Hughes are still the two lowest average
annual spenders. The only E&P whose expenditure drops below Halliburton is BP from 2011 and
onwards. The most probable reason for that is due to the Macondo blowout in April 2010 spilling about
5 million barrels of oil in the Gulf of Mexico, according to the national commission appointed by a
President’s Executive Order to assess the spill (see reference section). After this event, the company
SPE-179962-MS 13

announced a massive divestment program, including but not limited to, the selling of about $38 billion
worth of non-core assets, in order to compensate for accident-linked liabilities, according to its 4Q & Full
Year 2013 Results Presentation in February 2014 (see reference section). The drop seen in the BP’s
spending on R&D in the years following the spill is a logical consequence.
As the numbers show, Schlumberger is in its own league in that respect, with average annual R&D
expenditure of over a billion U.S. dollars. The E&Ps do not seem have any trouble matching and
surpassing the spending of Halliburton and Baker Hughes. The five-year annual expenditure averages are
tabulated in Table 2 for the E&Ps group and service companies group including and excluding Schlum-
berger. Remarkably, the absence of Schlumberger drops the average expenditure value for the service
companies group by 36 percent.

Table 2—Average annual R&D spending for each group.

In times of changing oil prices, the companies must reshape to adapt to the change, shifting their focus
from some project types to others, or exhibit other changes internally. In times of high oil price the
technically challenging unconventional development projects become more attractive, while in times of
low price, the focus shifts to optimization of the production from already developed resources, trying to
cut costs by being more efficient.
There is a positive correlation between the ability to cope with the price fluctuations and R&D
investment. Substantial R&D funding propels advances in technology that bear the desired efficiency
increases, as well as the capabilities to expand the corporations’ operational frontiers. Since the E&Ps
invest more than the service companies do (excluding Schlumberger), then they are in a better position
to face the oil price ups and downs, which explains the stock market responses shown previously in Table
1.
Nevertheless, the role of oilfield services companies is not constrained to R&D. Some of them can
make profits utilizing existing technology at a competitive advantage for a specific application, in a certain
region. For example, Baker Hughes successfully installed a 1000 gal/min abrasion-resistant centrilift
electric submersible pump (ESP) system, an artificial lift system, to a municipal water customer in
Arizona, increasing the run life by 400 percent and lowering intervention costs by 120,000 USD. Due to
that success, Baker Hughes ESPs were requested for four additional wells making Baker Hughes the sole
provider of ESP for this Arizona customer (see reference section).
Moreover, there is variance in the activity roles each service provider may take. For instance, as
mentioned in a previous section, Halliburton specializes in cementing services while Baker Hughes
focuses in formation evaluation. Each area requires investment of different form and depth, in terms of
R&D included.
14 SPE-179962-MS

The changing role of National Oil Companies and access to projects outside of the U.S.
The role of government-owned, national oil companies (NOCs) has changed over the past few decades.
This mainly has to do with their control over oil and gas reserves around the world, which used to be less
than 10 percent back in the 1970s. According to a 2011 study by The World Bank Group, NOCs account
for 90 percent of the world’s proven oil reserves and 75 percent of global oil production. Figure 9 shows
a comparison in terms of oil production and reserves control between the companies in the E&Ps group,
all of those being international oil companies (IOCs) with three of the biggest NOCs of the planet. The
data is taken from a mid-2013 publication in The Economist (see reference section). In both cases the
difference is massive. Out of the world’s top 25 oil and gas reserves holders and E&Ps, 18 are NOCs
(Tordo et al., 2011). Many are even able to be active internationally, outside the countries they belong to.

Figure 9 —NOC/IOC comparison in terms of production and reserves control (Data source: The Economist, 2013).

This has positive implications on the NOCs financing. Being bigger than most IOCs puts them in
position to enjoy larger extents of economies of scale. These are long-term average costs reductions large
enterprises obtain due to their size, production output and scale of operation. The cost per unit output
decreases with scale increase as a result of the fixed costs spreading over more output units. Therefore the
bigger NOCs eventually become more cost efficient than the smaller IOCs.
For instance, an NOC will be more likely to commission a tanker that can carry 700,000 barrels than
a smaller IOC that will probably have to settle with a tanker of only 100,000 barrel capacity; the larger
tanker will be longer and deeper requiring more steel. However, it will not likely require seven times more
steel, because the tankers hull surface area is what determines the amount of steel required. The larger
tanker’s power output and operating expenses are lower per unit output than the smaller and vessels with
crews of similar size. Yet, the output is still seven times larger. Consequently, the NOC enjoys seven times
higher output than the IOC at transport costs less than seven times as high.
Furthermore, unlike the U.S., in most other countries the government holds the mineral ownership of
all the properties in its sovereignty. The NOCs therefore maintain a primary role in contracts in their own
SPE-179962-MS 15

countries. As the IOCs see their participation in these international projects being compromised, they are
left with the option of providing assistance to the NOCs as their only participation opportunity. Doing so,
they compete with the service companies, taking contracts away from them.
In recent years there has been a trend of many countries adopting service contracts instead of
concessions or production sharing agreements for the exploitation of their domestic resources. A service
contract is a long-term contractual agreement between the host government and a corporation, where the
corporation will explore or develop a certain oil or natural gas field for a pre-determined fee. The host
government retains full ownership of its resource, but also bears all risk; in case the project fails it will
still have to pay the fee to the corporation (Ghandi & Lin, 2014). Many countries including Venezuela,
Kuwait, Iraq and Mexico have adopted service-type contractual frameworks.
Make no mistake. The term ⬙service contract⬙ also refers to oilfield service contracts for assisting
exploration and production operations usually awarded to service companies like Schlumberger, Halli-
burton and Baker Hughes. However, what is described in the previous paragraph is different; it is an
agreement between a host government and an operator (which can be a service company) and not between
an operator and a service provider (Ghandi & Lin, 2014).
From the service companies’ perspective this is bad news. Despite having the stability of the NOCs
backed by their governments as clients, they now have to compete with the IOCs in their own industry
sector. This means they have to be in position to offer services of better quality at lower price in order
to be awarded the contracts (Al-Fattah, 2013a & 2013b). The IOCs are also in position to offer efficient
and communication of cutting edge technology to NOCs. In addition, IOCs display the ability to manage
projects and run operations gained from their experiences. These risk management, decision making and
procurement control skills are of enormous value to any company, the NOCs being no exception.
Lastly, service companies are encountering another competitor with the emergence of national oil
service companies (NOSCs), in several countries. Backed by their governments have, just like the NOCs,
advantage for the award of contracts for domestic projects. For example, in April 2010, the Oil and Gas
Industry Content Development Bill was passed by the Nigerian government. This law requires all
petroleum explorers, E&Ps and transporters and exporters to use a bigger proportion of Nigerian service
companies in their projects (Tordo et al., 2011). This moves the balance towards local NOSCs such as
Ciscon Services and away from international service companies.
Things have gone from the times of when global energy resources where produced by IOCs, with the
(multinational) service companies as their only option for assistance, to resources being produced by
consortia exclusively led by NOCs, which have a variety of service companies, IOCs and NOSCs to
choose from for assistance (Al-Fattah, 2013a). The higher the competition the service companies are
facing in projects outside the U.S., the more unsteady they become financially when the oil price swings.
This is manifested in the stock market as violent stock price fluctuations.

Conclusion
The goal of this study is to analyze, explain and assess how volatility in the price of oil financially affects
the oilfield services sector of the industry. A group of service companies was compared to a group of oil
E&Ps (upstream) for the period from 1986 to 2015. Using the corporation’s stock price as the only
indicator of its performance, the following conclusions are drawn.
● Service companies are more financially sensitive than oil and gas E&Ps to fluctuations in the price
of oil.
● Developments in the production of unconventional resources due to technological advances are a
function of work done by service companies. These resources have higher economic limits than
conventional ones, and are therefore the first to become uneconomic when the price goes down.
16 SPE-179962-MS

● Global oil E&Ps tend to have downstream operations that can balance their losses in times of
falling crude oil price, and vice versa. Service companies do not exhibit that degree of vertical
integration and thus, suffer more.
● Moreover, as E&Ps expand, they become less and less dependent on service companies for
assistance in their projects. E&Ps devote significant proportions of their budgets to R&D, which
was traditionally conducted by the service companies. As a result, oil E&Ps are more capable of
fronting price changes than the service companies.
● The increasing dominance of NOCs over IOCs in terms of projects outside the U.S. has left the
E&Ps competing with the service companies (and NOSCs) for becoming assistance providers to
the NOCs. As the competition against the service companies increases, the more financially
unstable they become to oil price ups and downs.
Finally, there are some topics that can be discussed further in future assessments. This includes the
noteworthy change in the causality trends for both groups in the post 2008 period, as shown in the
regression analysis, as well as the exploration of parameters other than the price of oil that may impose
financial implications on the oilfield services industry.

Acknowledgements
The author would like to thank Dr. Krishan A. Malik for his valuable encouragement, help and direction
during the writing of this paper. Additionally, the author would like to thank Antonis Kartapanis for his
advice on the regression analysis and Rachel L. Luna for the editing.

References
Al-Fattah, Saud M. ⬙National Oil Companies: Business Models, Challenges, And Emerging Trends.⬙ Corporate Ownership
& Control 8th ser. 11.1 (2013): 727–36. Web.
Al-Fattah, Saud M., The Role of National and International Oil Companies in the Petroleum Industry (January 27, 2013).
USAEE Working Paper No. 13–137. Available at SSRN: http://ssrn.com/abstract⫽2299878 or http://dx.doi.org/
10.2139/ssrn.2299878
Baker Hughes, Inc. Baker Hughes ESPs Increased Run Life 400% for Arizona Water Department. N.p., 2012. Web. 9 Feb.
2015. ⬍ http://assets.cmp.bh.mxmcloud.com/system/96599d804d94403e9215de5516d322ef/pdfs/pdf/bk2.pdf⬎.
Bedeian, A. G., and K. W. Mossholder. ⬙Simple Question, Not So Simple Answer: Interpreting Interaction Terms in
Moderated Multiple Regression.⬙ Journal of Management 20.1 (1994): 159 –65. Web.
BP. 4Q & Full Year 2013 Results Presentation. BP, 4 Feb. 2014. Web. 9 Feb. 2015. ⬍ http://www.bp.com/content/dam/
bp/pdf/investors/bp_fourth_quarter_2013_presentation_slides_and_script.pdf⬎.
Economides, Michael J., Ronald E. Oligney, and Armando Izquierdo. The Color of Oil: The History, the Money, and the
Politics of the World’s Biggest Business. Katy, TX: Round Oak Pub., 2000. N. pag. Print.
⬙Financial Information.⬙ Chevron Phillips Chemical Company, LLC. N.p., n.d. Web. 20 Mar. 2015. ⬍ http://www.
cpchem.com/en-us/company/financialinfo/Pages/default.aspx⬎.
Ghandi, Abbas, and C. Y. Cynthia Lin. ⬙Oil And Gas Contracts Around The World.⬙ Review. 14 Mar. 2014: n. pag.
University of California at Davis. Web. ⬍ http://www.des.ucdavis.edu/faculty/Lin/service_contracts_review_paper.
pdf⬎.
Gillard, M. R., Medvedev, O. O., Hosein, P. R., Medvedev, A., Peñacorada, F., & d’Huteau, E. (2010, January 1). A New
Approach to Generating Fracture Conductivity. Society of Petroleum Engineers. doi: 10.2118/135034-MS
Helman, Christopher. ⬙Itemizing The Oil Bust: 75,000 Layoffs And Counting.⬙ Forbes. Forbes Magazine, 16 Mar. 2015.
Web. 24 Mar. 2015. ⬍ http://www.forbes.com/sites/christopherhelman/2015/03/16/oil-layoffs-itemized-75000-and-
counting/⬎.
Kaplan, Robert S., and David P. Norton. ⬙Chapter 13: Leadership And Mobilization.⬙ The Strategy-focused Organization:
How Balanced Scorecard Companies Thrive in the New Business Environment. Boston, MA: Harvard Business
School, 2001. N. pag. Print.
Michael, Andreas. Economic Implications Of The Current Geopolitical Forces Vis-a-vis Hydrocarbons On Global Energy
Markets. Proc. of 2014 SPE Hydrocarbon Economics and Evaluation Symposium, Houston, Texas. Society of
Petroleum Engineers, 20 May 2014. Web. 20 Mar. 2015.
SPE-179962-MS 17

Phillips, William A. ⬙The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United
Kingdom, 1861–1957.⬙ Economica ns 25.100 (1958): 283–299. Print.
Raval, Anjli. ⬙Oil Price Plunge Means Survival of Fittest - FT.com.⬙ Financial Times, The Commodity Note. Financial
Times, 10 Dec. 2014. Web. 9 Feb. 2015. ⬍ http://www.ft.com/intl/cms/s/0/51cc00ba-7f85_11e4_86ee-
00144feabdc0.html#axzz3WOx03Hin⬎.
Schlumberger. ⬙Case Study: Channel Fracturing Increases Production by 37% for Petrohawk in the Eagle Ford Shale.⬙
(n.d.): n. pag. Web. 9 Feb. 2015. ⬍ http://www.slb.com/~/media/Files/stimulation/case_studies/hiway_fracturing_
eagle_ford_shale_cs.pdf⬎.
⬙Shell Technology Center | Houston.⬙ Shell US Website. Royal Dutch Shell Plc, n.d. Web. 20 Mar. 2015. ⬍ https://
www.shell.us/aboutshell/projects-locations/shell-technology-center---houston-.html⬎.
⬙Spot Prices for Crude Oil and Petroleum Products.⬙ Spot Prices for Crude Oil and Petroleum Products. U.S. Energy
Information Administration, n.d. Web. 20 Mar. 2015. ⬍ http://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm⬎.
⬙Supermajordämmerung: The Day of the Huge Integrated International Oil Company Is Drawing to a Close.⬙ n.d.: n. pag.
The Economist. The Economist Newspaper, 03 Aug. 2013. Web. 07 May 2015.
Tordo, Silvana, Brandon S. Tracy, and Noora Arfaa. National Oil Companies and Value Creation. Working paper no. 218.
Washington, DC: World Bank Group, 2011. Print.
Trefis Team. ⬙Chevron’s Earnings Rise On Thicker Downstream Margins; Production Outlook Intact.⬙ Forbes. Forbes
Magazine, 05 Nov. 2014. Web. 31 Mar. 2015.
USA. National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling. DEEP WATER: The Gulf Oil
Disaster and the Future of Offshore Drilling. By Bob Garaham, William K. Reilly, Frances Beinecke, Donald F.
Boesch, Terry D. Garcia, Cherry A. Murray, and Fran Ulmer. N.p.: n.p., 2011. Print.
⬙Yahoo Finance Canada.⬙ Yahoo Finance Canada. Yahoo, n.d. Web. 9 Feb. 2015. ⬍ https://ca.finance.yahoo.com/⬎.
Yergin, Daniel. The Prize: The Epic Quest for Oil, Money, and Power. New York: Simon & Schuster, 1991. Print.
18 SPE-179962-MS

Appendix
Linear regression results from Microsoft Excel
SPE-179962-MS 19
 20 SPE-179962-MS

View publication stats