Home' Trinidad and Tobago Guardian : November 27th 2014 Contents BG8 ENERGY
BUSINESS GUARDIAN www.guardian.co.tt NOVEMBER 2014 • WEEK FOUR
Oil companies rarely soil their hands with the business
of extracting the hydrocarbons that are their lifeblood.
The job of drilling, constructing and maintaining wells
is largely delegated to oil-field-services companies.
In a deal announced on November 17, Halliburton,
the world s second-largest such company by market
capitalisation, is set to buy Baker Hughes, the third-
largest, for US$38 billion in cash and shares. The deal
is sure to prompt a round of consolidation in the industry:
Three days later Technip, a French oil-field-services
firm, said that it had bid for a local rival, CGG.
Drilling for oil may be grubby, but mastering the
technology is lucrative. Schlumberger of France, the
biggest of the bunch, made profits of US$7 billion on
revenues of US$45 billion in 2013. The combined revenues
of the American firms will be greater, and together they
may match its performance. Margins are similar in
America, where Halliburton and Schlumberger are equal
competitors. In the rest of the world the French firm
is bigger and more profitable.
The marriage with Baker Hughes will give Halliburton
economies of scale and the ability to spread its costs
more widely. It puts annual savings at US$2 billion. The
new firm also will match Schlumberger in the breadth
of services it offers. Halliburton can plug gaps with two
technologies at which Baker Hughes excels: "artificial
lift," which boosts the pressure and recovery rate from
wells, and specialty chemicals that help oil flow more
cheaply and safely.
Joining forces will help the two companies cope with
an expected downturn in the industry s fortunes. The
price of oil has fallen by 30 per cent since June. As a
result most big Western oil companies intend to cut
capital spending, which means a drop in revenues for
the oil-field-services firms. Becoming a one-stop shop
on the scale of Schlumberger will make it easier to win
contracts from state-owned national oil companies,
which are an increasingly important source of busi-
While the oil majors suffer, the nationally owned
companies are expanding. They control most of the
world s known reserves, and their oil and gas is generally
cheap to extract and, thus, less sensitive to price swings.
Companies under the control of politicians often have
other motivations for maintaining investment, such as
preserving jobs. Saudi Arabia is pouring cash into drilling
for gas to run its power stations.
Oil companies and antitrust authorities are bound
to worry about a deal that will cut the number of big
competitors in the industry. To appease them, Halliburton
is promising to sell businesses with annual revenues of
as much as US$7.5 billion if the takeover goes through.
Brad Handler of Jefferies, an investment bank, thinks
that oil companies may not kick up too much fuss,
since they will be less in need of the services companies
for the foreseeable future.
As the weak oil price drags down the shares of oil-
field-services firms, others may be bought.
General Electric has already invested heavily in the
business of making drilling equipment, and may be
keen to buy into the services side. National Oilwell
Varco, the biggest rig-hire firm, also plans to diversi-
fy.Moreover, though their business does not look great
at the moment, the long-term outlook for the services
firms looks good. As production from some of the
world s biggest fields matures, there will be ever more
need for the firms expertise in squeezing out every last
drop. @2014 The Economist Newspaper Ltd. Dis-
tributed by the New York Times Syndicate
between Saudi Arabia, fel-
low OPEC member
Venezuela and oil powers
Russia and Mexico yielded
no agreement on Tuesday
on how to address a growing oil glut, ending
without any plan to cut output despite a
collapse in prices.
In a day of shuttle diplomacy before
OPEC s output meeting in Vienna on Thurs-
day, energy officials from non-members
Russia and Mexico rushed to the Austrian
capital to push OPEC kingpin Saudi Arabia
on the 30 per cent price fall since June.
Saudi has kept the market guessing about
its response to crude s fall amid rapidly rising
US shale output, but Tuesday s talks had
led to speculation in some quarters that
Riyadh might back a coordinated cut involv-
ing non-OPEC members.
Venezuelan Foreign Minister Rafael
Ramirez told reporters after the talks that
while all sides agreed current prices were
"not good" for producing countries, no
coordinated output cuts were arranged on
"We discussed the situation in the market,
we shared our points of view, we need to
keep in contact and we agreed to meet again
in three months," Ramirez, who until recently
was oil minister and president of state oil
company PDVSA, said.
Venezuela, a noted price hawk, would try
for an output agreement within OPEC on
Thursday instead, he said.
Oil prices turned lower after the talks,
with international benchmark Brent falling
more than US$1 a barrel.
Igor Sechin, the head of Russian state oil
company Rosneft and a close ally of Pres-
ident Vladimir Putin, arrived in Vienna on
Tuesday amid hints that Moscow could cut
output or exports if the producer group did
the same. Russian Energy Minister Alexander
Novak also attended the four-country meet-
"I d like to highlight that current oil prices
are not critical for us. We can postpone
some capital-intensive projects," Sechin told
the meeting, according to a Rosneft state-
"What is going to happen of course is
that it (low prices) will have an impact on
the global oil supply," he said, apparently
referring to a possible longer-term drop in
output in countries where oil production is
more expensive, including some projects in
the United States.
Mexican Energy Minister Pedro Joaquin
Coldwell left the meeting before the other
participants, without giving a statement.
Eyes turn to Thursday
Oil market watchers are divided on the
outcome of OPEC s Thursday meeting. Pre-
dictions range from a large production cut
to revive prices, to a small reduction, or
none at all.
Current prices are far below what most
OPEC members and rival producers such
as Russia need to balance their budgets, but
the group has struggled to adapt to growing
supplies from the US shale boom.
Some analysts say an OPEC cut of as
much as 1.5 million barrels per day (bpd) is
needed to support oil prices and avoid
increasing a supply glut in the first half of
Algerian Energy Minister Youcef Yousfi
told the official APS news agency on Tuesday
that OPEC would seek a "consensual step"
to try to bring stability to the oil market,
without giving further details.
Diplomatic and market sources say Saudi
officials told briefings in recent months that
the kingdom, with its large currency reserves,
was prepared to withstand oil prices as low
as US$70-US$80 per barrel for up to a year.
Saudi Oil Minister Ali al-Naimi said earlier
this month that Riyadh s desire for stable
markets had not changed but gave no clue
about his potential response.
In Vienna on Monday and Tuesday, Naimi
brushed off reporters questions about oil
prices and surplus supplies. "This is not the
first time the market is oversupplied," he
Naimi did not speak to reporters after
Tuesday s meeting.
Russia s Kommersant newspaper cited
sources on Monday as saying Russia might
suggest cutting its oil production by around
300,000 bpd from next year and that
Moscow expected OPEC to limit its output
by another 1.4 million bpd.
Moscow s relations with OPEC were
soured by the country s pledge to cut output
in tandem with the group in the early 2000s.
Russia failed to follow through, and raised
Iranian news agency Shana said Putin
and Iranian President Hassan Rouhani spoke
by telephone on Monday evening and agreed
"on necessary cooperation in favour of oil
The agency did not say where it acquired
the information. On Monday, the Kremlin
said the presidents discussed Iranian nuclear
talks and bilateral issues and made no men-
tion of oil.
On Monday, Iran and six world powers
agreed to yet another extension in the talks
aimed at resolving a 12-year-old dispute
over Tehran s nuclear programme until June
That makes any quick revival in Iran s oil
exports very unlikely and removes a potential
layer of complication to this week s OPEC
Saudi, Russia pre-OPEC
talks yield no oil output cut
• Saudi, Russia, Venezuela, Mexico fall short of agreement
• Oil drops more than $1 after 4-country shuttle diplomacy
• Crude prices down about 30 per cent since June
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