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The Wall Street Journal: Halliburton Plays Catch Up

Wall Street Journal Middle East Graphic

CEO’s Part-Time Stint in Middle East
Is Move to Cash In on 3-Year Boom
March 14, 2007; Page A8

Halliburton Co.’s chief executive joins the swelling ranks of Westerners hoping more face time in the Middle East will help them cash in on the region’s investment surge and bustling oil-field activity.
The oil-field services company’s announcement this weekend that Chief Executive David J. Lesar would set up an office in Dubai and spend a portion of the year there is a grand gesture intended to pick up business in the region. Mr. Lesar follows others who are courting increasingly powerful government and national-oil company executives from the Middle East and Asia. The three-year surge in oil prices and the region’s vast reserves have helped turn Dubai, a semi-autonomous state and part of the United Arab Emirates, into an oil boomtown.

The move marks the latest effort at corporate flattery amid a surge of investment in the Middle East and a rush by oil companies to solidify their presence there. Schlumberger Ltd., the world’s largest oil-field service company by revenue, has had a long presence there. The company just opened a training center in Abu Dhabi with Abu Dhabi National Oil Co., known as Adnoc.

“Everyone is trying to grow their presence in the Middle East,” said C.K. Poe Fratt, senior oil-fields services analyst at A.G. Edwards.

The challenge of expanding in the Middle East is particularly acute for Halliburton because in recent years it has been inextricably linked with the U.S. government. Its former chief executive, Dick Cheney, became the vice president. And its logistics contract for the U.S. military turned Halliburton into a giant defense contractor and effectively an arm of the U.S. military presence in Iraq.


•  Changing Places: Halliburton hopes its CEO will drum up more Middle East business through his increased presence in Dubai.
•  Shifting Power: The three-year oil boom has led to big investment and increasing heft in the region.
•  Keeping Track: The move likely won’t affect company probes, which are already international in nature.
Moreover, in 2006 it generated about half of its energy-services revenue, or $6.46 billion, from North America — a mature oil province with limited growth potential. Its Middle East and Asia energy services accounted for $2.19 billion, or 17% of total revenue. In contrast, in the same period, Schlumberger’s North American energy revenue made up only 31%, or $5.27 billion, of its total, while the Middle East and Asia accounted for 24%, or $3.96 billion.

Halliburton on Sunday, in announcing the move, characterized the new Dubai office as “a corporate headquarters.” That drew criticism in Washington. Sen. Hillary Clinton (D., N.Y.) Monday questioned whether Halliburton would still pay U.S. taxes or face its continuing investigations. “I think it raises a lot of very big concerns and I think we are going to be looking into that in Washington,” she said. Halliburton has since emphasized that it would remain a U.S. company with its main office in Houston.

It is unlikely that Mr. Lesar moving to Dubai will shield it from taxes or inquiries. Emphasizing an office in the Middle East is unlikely to result in any tax benefits to the company because its structure remains about the same, analysts say.

Halliburton’s work is international by nature and probes into its conduct have been largely focused on its activities outside of the U.S. One criminal probe, that has involved investigators in the U.S., United Kingdom, France, Switzerland, Nigeria and Japan, is into whether a Halliburton-led construction consortium paid bribes to Nigerian officials through a British agent. The company has said it is cooperating. U.S. probes into Halliburton’s work for the military have focused on procurement operations in Iraq and Kuwait.

The move comes as the company has shifted its focus to its oil-field services business, which offers know-how and equipment to oil companies around the world. Halliburton’s KBR unit, which performed the controversial military contracting in Iraq, is a less-profitable part of its business and was recently spun off.

For oil-service companies, the rich oil fields of the Middle East and Africa offer much more growth potential. The Middle East holds just less than two-thirds of the world’s known reserves of oil, and it pumps about a third of global output. Amid four years of soaring energy prices, many major Middle Eastern oil-producing countries have launched ambitious, multiyear oil-field expansion efforts. While the region has been a crucial supplier of oil for decades, many Western companies de-emphasized it in favor of the North Sea, Alaska and other places after a Middle Eastern oil-company nationalization wave in the 1970s.

With government coffers full, state-controlled oil companies are investing heavily in their fields and in other energy-related developments across the region. Saudi Arabia, for instance, is in the midst of a project to sharply raise its production capacity and build its refining and petroleum-related chemical businesses. In Qatar, the government has wooed a handful of international oil companies to help it develop its massive natural-gas reserves.

These multibillion-dollar efforts will require rigs, specialized instruments and specially trained engineers for years to come. Most of the region’s state-controlled oil companies — just like big, publicly traded oil companies like Exxon Mobil Corp. and Royal Dutch Shell PLC — contract out for these critical oil-field services.

While oil companies have also poured billions of dollars into new investment in the U.S., the country’s older fields don’t offer the same sort of growth potential. In 2005, Middle Eastern output rose some 2% from the previous year, according to the BP Statistical Review. In the U.S., meanwhile, production fell 5.5%.

In the case of Halliburton, increased activity in the Middle East has already resulted in some big deals. Last year, the company won a multimillion-dollar contract to provide oil-field services for the Saudi Aramco’s Khurais oil and natural-gas project.

The company also plans to expand in Africa and Russia. As the company increasingly looks to international markets, the proportion of income generated in North America will decline, analysts say. Brad Handler, director of oil-field and energy services at Wachovia Capital Markets, expects as much as 55% of the company’s operating income to come from regions other than North America by 2008, up from the current 40%.

Write to Ana Campoy at [email protected], Russell Gold at [email protected] and Chip Cummins at [email protected]

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