Odd Arne Sjåtil
Partner & Managing Director
Related Expertise Energy & Environment
A Win-Win for Operators and Contractors?
Protracted weakness and volatility in commodity prices have taken a punishing toll on oil and gas companies. In response, these companies have focused heavily on increasing efficiency and reducing costs. The current wave of alliance activity—including alliances, joint ventures (JVs), and M&A—among oilfield services and equipment (OFSE) companies, which is spawning an array of promising new offerings, could prove to be a critical enabler of these efforts. And it could make a meaningful difference to the business prospects of OFSE companies, which are also under considerable pressure to cut costs and boost revenues.
Successful outcomes for both operators and contractors are by no means guaranteed, however. In addition to their potential benefits, these alliances present risks to oil and gas companies. These include the risk posed by the growing market share captured by these alliances, which gives participating OFSE companies considerable pricing power. OFSE players in these alliances also face risks, including the challenges of integration and of delivering a credible and distinctive value proposition.
The current downturn in the oil and gas industry is worse than most companies and analysts had envisaged. This challenging industry environment has had a substantial impact on oil and gas companies, many of which have made substantial cutbacks in capital spending and head count.
Amid the industry’s challenges, however, there are reasons for encouragement. These include the improvements in efficiency that the industry has already achieved and continues to pursue. Driven by the quest for greater efficiency and lower costs, the industry is experiencing sweeping changes across its entire landscape: increasingly innovative solutions, growing standardization, and surging creativity in the development of new cost-saving technologies.
In parallel, there has been a new emergence and acceleration of alliance activity, including JVs and M&A, among OFSE companies as they rethink their business models and try to improve the attractiveness of their offerings in response to this environment. (See Exhibit 1.) The first such combinations encountered skepticism among other OFSE players. But increasing numbers of OFSE companies have formed alliances of their own as these combinations appear to be demonstrating real value and gaining acceptance among oil and gas firms.
Most of these combinations fall into three categories (see Exhibit 2):
We believe that five forces support further alliance, JV, and merger activity in this environment:
Additionally, oil and gas companies, concerned about the potential effects of OFSE alliance activity on competition and pricing power within the industry, may encourage additional alliances in an effort to broaden the number of contractors offering certain solutions.
OFSE alliances offer oil and gas companies the potential for sizable cost cuts and gains in efficiency. This holds especially for the development of offshore resources. Making these projects more cost-efficient demands considerable engineering firepower, and some of the biggest players interested in this arena—including Saipem, Technip, Aker Solutions, and Subsea 7—are aggressively pursuing this, having already formed alliances to further boost their scale and expand competencies. Such efforts could ultimately transform the competitive dynamics of the offshore and subsea markets.
Through the delivery of innovative packaged solutions, OFSE alliances could also help oil and gas companies substantially reduce their interface costs, risks, and co- ordination requirements. In addition, OFSE providers could offer solutions that help oil and gas companies reduce their startup time to “first oil” and improve oil recovery efforts in brownfield basins.
Moreover, these alliances could develop new technologies that otherwise might not have been conceived. These technologies could prove valuable in enhancing reservoir recovery rates or lowering project costs.
In addition to their potential benefits, however, OFSE alliances pose risks to oil and gas companies:
To maximize their chances of realizing the value these new entities could offer while mitigating the risks, oil and gas companies will likely have to reconsider their current procurement approach, engaging early in the design process and with a view toward a longer-term partnership.
To position an OFSE alliance optimally and maximize its chances of success, participants must make critical decisions about the alliance’s design. They must ask themselves the following questions:
Answers to these questions will vary considerably, given the wide range of development trajectories that these deals can take. In some cases, an alliance is a first step toward a merger or acquisition (“engagement before marriage”), as was the alliance between FMC Technologies and Technip that spawned Forsys Subsea. An alliance can also be a trial move, one that is inspired by commercial needs but ultimately lacks a real technical and operational value proposition.
It is worth noting that alliances and JVs have materialized in previous cycles, though most have not had a lasting and material impact on the oil and gas industry. History also tells us that, in many cases, soft alliances (JVs and partnerships, not M&A, obviously) tend to fall apart when oil prices rebound and companies feel strong enough to pursue strategies unilaterally.
Assuming a JV or an alliance is intended as a long-term venture, we believe that there are four key preconditions for its success:
Oil prices now stand substantially above their lows of early 2016 but are still roughly half what they were before they began their extended slide in mid-2014. As a result, oil and gas companies as well as OFSE players continue to face considerable ongoing financial pressure. OFSE alliance activity could prove an important part of the answer for both types of company.