Schlumberger is the world’s leading supplier of technology, integrated project management and information solutions to customers working in the oil and gas industry worldwide. Founded in 1926, the company employed more than 82,000 people by the end of March 2008, who represented over 140 nationalities working in approximately 80 countries. Knowledge, technical innovation and teamwork are at the centre of Schlumberger’s operations, with the objective of delivering solutions that improve oil and gas companies’ performance. With 23 research and engineering facilities worldwide, and a research and engineering (R&E) investment of $819m, a strong emphasis is put on developing innovative technology that adds value to exploration and production (E&P) operations.
The oil and gas industry is currently going through another cycle, with the period of strong activity from 2005 to 2008 being followed by a significant contraction in 2009. Decreased investment levels can impact Schlumberger in three main areas:
•A major decline in activity related to gas drilling and completion in the US. The increased production of unconventional gas – which has been a technological success story in the development of resources that were deemed marginal only a decade ago – combined with decreased natural gas demand in the US, has led a price erosion for gas that is impacting the development of several shale plays.
•A reduction in exploration activity throughout the world. This is affecting both seismic and exploratory drilling, especially in frontier areas, for which exploration and development costs would be higher than current oil prices.
•A drop in rig activity in Russia, amplified by currency factors. Given the high natural decline rates, recovery through increased investment would need to be steep once oil demand returns.
In other areas, while most IOCs and several NOCs have announced that so far they are planning to maintain their activity, they also are expecting a significant reduction in operating costs to compensate for the high inflation experienced during the 2004-2008 period. Negotiations are going on with both operators and suppliers to optimize costs in the current environment, with these costs including the impact of decreased commodity prices that had been one of the main inflation drivers. Long lead items required in E&P operations, however, will require more time to incorporate price changes.
Within this environment, Schlumberger is determined to protect its investment in three ways:
•A commitment to continued technology development. The time required between a new product concept phase and its deployment in oilfield operations is generally far longer than the period of one industry cycle. Stopping and restarting R&E projects can be very costly; therefore, Schlumberger will not reduce its R&E spending – maintaining it in 2009 at a level similar to 2008. At the same time, the company is progressing with its strategy of opening focused technology centres close to major E&P development countries. Recent examples include the Dhahran research centre dedicated to carbonates in Saudi Arabia, a gas condensates technology centre in Russia, a heavy-oil centre in Venezuela, and a new regional technology centre in Brazil that will be working on pre-salt oil deposits. The overall R&E portfolio is evolving in line with the shift of production to reservoirs in extreme environments and unconventional hydrocarbons.
•The development of expertise among engineers and field specialists. Schlumberger has recruited and trained over 20,000 technical staff since 2004, and it is critical that the industry does not lose this expertise. In line with the current market cycle, the company has recently announced plans to reduce its workforce, which will mainly impact the three markets described earlier – but it is critical that the company does not lose any acquired expertise. In addition, the industry is also faced with a “crew change”, and it is essential that retirement is managed in order to have a sufficiently large qualified workforce when higher levels of activity return.
•Service delivery performance. The Schlumberger initiative on “Excellence in Execution” combines a focus on quality, through the continuous upgrading of the systems and procedures used in E&P operations, with a major overhaul of maintenance systems and an emphasis on product and service reliability through manufacturing best practices.
In summary, downturns in the E&P sector are becoming shorter and shorter. Given current post-peak oilfield decline rates, it remains critical to replace production and add new capacity in order to avoid future tensions between oil demand and supply.