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Reuters: Oil service cos. see profit in project management

Mon Aug 6, 2007 2:08PM EDT
By Anna Driver and Michael Erman

HOUSTON/NEW YORK (Reuters) – Oilfield service firms see growing profit in managing entire projects, as state-owned oil companies tighten their grip on resources and seek to cut out big oil companies, the historic middlemen.

A three-year rally in oil prices has left resource-rich countries such as Russia and Venezuela more intent on taking ownership of their oil and natural gas reserves, shrinking the pool for companies like Exxon Mobil Corp. (XOM.N: Quote, Profile, Research), Royal Dutch Shell Plc (RDSa.L: Quote, Profile, Research) and BP Plc (BP.L: Quote, Profile, Research).

But many of the state-owned companies still lack the expertise to run huge projects, creating an opportunity for service companies like Schlumberger Ltd. (SLB.N: Quote, Profile, Research) and Halliburton Co. (HAL.N: Quote, Profile, Research) which have the technical know-how to act as general contractors.

“Integrated oil companies were once needed for their balance sheet, their project management and their technology,” said Bill Herbert, analyst with energy investment bank Simmons & Co. “But now, companies like Schlumberger and others do project management just fine, and so can others.

“The blunt reality is unless you are in desperate need of capital, the integrated oil companies are becoming less important to national resource holders,” he said.

Schlumberger has been touting “integrated project management” programs in which it oversees an entire project, from seismic studies to find oil and gas deposits to drilling, well construction and production.

“National oil companies are relatively inexperienced exploration and production companies,” Andrew Gould, the chief executive officer of Schlumberger, told investors on its latest conference call.

Schlumberger said it booked $3.8 billion of new or extended contracts in the second quarter in its integrated project management unit in countries like Russia and Latin America. And contracts through the end of the decade total $4.8 billion.

Halliburton, with headquarters in Houston and Dubai, is also pushing its ‘One Halliburton’ approach, in which it bundles packages of products and services as a way to differentiate itself from competitors.

Smaller oil services company Weatherford International Inc. (WFT.N: Quote, Profile, Research) has also said it sees project management as a way to grow its business. On its most recent earnings call, the company said its project management business is expected to produce about $750 million over the next two years.

DEEP POCKETS

Traditionally, the oil majors have helped to fund or guaranteed financing for expensive projects. But with oil trading near record levels, the national oil companies can tap capital markets or fund these undertakings with their own cash flow, said Amy Myers Jaffe, an energy research fellow at the Baker Institute at Rice University in Houston.

“The national oil companies have higher cash flow; therefore they are in a better position to use their own money to hire service companies,” she said. “They don’t need the (majors) to come in as a bank,” she said.

Several of the national oil companies have already started loosening their ties with the majors.

In June, Venezuelan President Hugo Chavez pushed Exxon and ConocoPhillips (COP.N: Quote, Profile, Research) out of multibillion dollar heavy-oil ventures in the country as part of a nationalization drive there.

And last year, Russia’s Gazprom scrapped a yearlong bidding process for its giant Shtokman gas field, saying it would develop the field without any foreign equity partners.

Later, Gazprom signed a deal with France’s Total (TOTF.PA: Quote, Profile, Research) that would allow the French major to temporarily book reserves from Shtokman. Still, Gazprom will remain the field’s license holder as well as the sole owner of gas produced.

“When the integrateds come in, they want a piece of the action; these local governments are increasingly unwilling to give them that,” said Argus Research analyst Phil Weiss.

Myers Jaffe said that a tactic the majors could use to attract business from the national oil companies would be to swap refining and marketing assets for access to reserves.

“What do the majors have now that the NOCs would like? They have downstream expertise and downstream assets,” she said.

“My advice would be that there is a deal there. If I start making the technology argument, (the NOCs) are going to say, ‘I can pay Schlumberger for that.”‘

© Reuters 2007. All rights reserved.

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