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Shell looks to avoid paying for low-value drilling

Thu Jul 21, 2011 9:06pm GMT

* Push against paying service firms for low-margin work

* Oil service profit margins rising again with oil prices

HOUSTON, July 21 (Reuters) – An executive at Royal Dutch Shell Plc sees a new Chinese partnership as an opportunity to avoid paying oilfield service companies for drilling they could do just as effectively themselves.

The venture with state-owned China National Petroleum Corp will build systems to automate repetitive drilling, with a goal of having them in the field by 2013, said Peter Sharpe, executive vice president, wells, at Shell Global Solutions International BV.

While Shell expects it will need traditional services in most instances, drilling in coalbed methane and heavy oil fields is relatively simple and can often be automated, he said.

“There are parts of our business where we think we can do better without them (service companies), and we intend to prove that,” Sharpe told a media luncheon in Houston outlining the plan, which was first unveiled last month.

The partners are putting together a Singapore-based entity to run the project, but the software-managed drilling piece is already in use in the Netherlands and North America, he said.

Scale and longevity would determine whether the approach would work on a project, which would need at least hundreds of similar wells. Apart from coal-bed methane, he also mentioned the Carbon Creek heavy oil project in Canada as a good fit.

Sharpe said the goal was to convert more of the service function from a low-volume, high-margin business to one that is high volume with low profit margins.

His speech happened to come a day before oilfield services industry leader Schlumberger Ltd reports second-quarter results, and just days after rival Halliburton Co posted a sharp increase in profits.

The push to cut service costs is reminiscent of colorful verbal sparring a few years ago between the former Shell CEO, who called service companies “plumbers,” and Andrew Gould, the Schlumberger CEO who steps down this month.

Speaking at the CERAweek conference in Houston in 2009, Gould’s response to calls for oilfield service companies to cut rates in response to a dramatic drop in the price of oil was: “When did the bill from your plumber last go down?”

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