Iraq Boosts Outlook for Services Sector
2010 Energy Intelligence Group, Inc.
Monday, February 22, 2010
After a distinctly forgettable 2009, oil-field services companies are looking to the immediate future with greater optimism. Recently announced fourth-quarter earnings were, admittedly, generally weak, but there is a new sense of confidence in the sector that can be summed up in one word -- Iraq. The collapse in oil prices in the second half of 2008 prompted the industry to rethink capital spending plans for 2009, and many independents subsequently cut budgets (PIW Dec.22'08,p4). Anxious to learn from the mistakes of previous downturns, the integrated majors and leading national oil companies sought to maintain investment despite the oil price slump. But they also went on an aggressive drive to extract maximum value for money from contractors and force down costs, making for a difficult 2009 for the oil-field services sector (PIW Mar.2,p1).
The two licensing rounds held by Baghdad last year have seen a swathe of national and international oil companies signing multibillion dollar contracts to revitalize the country's oil fields and aggressively ramp up production in a relatively short timeframe. But with much of Iraq's infrastructure damaged or destroyed by years of war and sanctions, foreign oil-field services firms are expected to play a pivotal role in providing equipment, services and personnel. By the end of 2010, the size of the Iraqi oil-field services market could jump from less than $500 million per year to $3 billion-$5 billion, according to Barclays analyst James West. A virtually nonexistent Iraqi oil-field services sector means international companies will have to step in to do the work, and they are already drooling over what they expect to be "highly profitable" margins of 20%-40%, says UBS analyst Angie Sedita.
The larger services firms have wasted no time positioning themselves. Halliburton has earmarked $100 million of its 2010 capital budget to building infrastructure in Iraq and has already secured a contract with state Southern Oil Co., but US rival Weatherford has set the pace, with $400 million worth of Iraqi contracts already secured, four rigs in operation and plans for another four by the end of the first quarter. Views on the type of contracts that will initially be on offer vary. Some expect smaller-scale contracts as operators first look to overhaul or repair existing wells -- BP, for example, secured a contract for the giant Rumaila field with state China National Petroleum Corp. (CNPC), and has indicated that it will focus on fine-tuning existing production before starting work on increasing output in the second half of 2010. But Halliburton has noted that some of its customers believe "it may be easier based on the press of time to just bring the rigs in and drill new wells."
The looming upstream boom in Iraq raises a couple of questions, the first over who is most likely to benefit. Last year's licensing rounds saw many state firms fare better than the majors, and services firms from China, India and elsewhere in Asia can similarly be expected to compete aggressively with the Western engineering giants. CNPC will also be the operator for the Halfaya field, and is likely to use cheaper Chinese drilling crews and oil-field workers to help keep costs down on that field and possibly on Rumaila, too (PIW Jan.18,p1).
The second question is over how upstream costs will be affected. With huge expansions also taking place in Brazil and Australia and a nascent revival in Canada's oil sands, the pieces are in place for another squeeze on services and raw materials. Countering that, however, is the still-fragile state of the global economy, and the consequently uncertain outlook for oil demand and oil prices.
2010 Energy Intelligence Group, Inc.
Monday, February 22, 2010
After a distinctly forgettable 2009, oil-field services companies are looking to the immediate future with greater optimism. Recently announced fourth-quarter earnings were, admittedly, generally weak, but there is a new sense of confidence in the sector that can be summed up in one word -- Iraq. The collapse in oil prices in the second half of 2008 prompted the industry to rethink capital spending plans for 2009, and many independents subsequently cut budgets (PIW Dec.22'08,p4). Anxious to learn from the mistakes of previous downturns, the integrated majors and leading national oil companies sought to maintain investment despite the oil price slump. But they also went on an aggressive drive to extract maximum value for money from contractors and force down costs, making for a difficult 2009 for the oil-field services sector (PIW Mar.2,p1).
The two licensing rounds held by Baghdad last year have seen a swathe of national and international oil companies signing multibillion dollar contracts to revitalize the country's oil fields and aggressively ramp up production in a relatively short timeframe. But with much of Iraq's infrastructure damaged or destroyed by years of war and sanctions, foreign oil-field services firms are expected to play a pivotal role in providing equipment, services and personnel. By the end of 2010, the size of the Iraqi oil-field services market could jump from less than $500 million per year to $3 billion-$5 billion, according to Barclays analyst James West. A virtually nonexistent Iraqi oil-field services sector means international companies will have to step in to do the work, and they are already drooling over what they expect to be "highly profitable" margins of 20%-40%, says UBS analyst Angie Sedita.
The larger services firms have wasted no time positioning themselves. Halliburton has earmarked $100 million of its 2010 capital budget to building infrastructure in Iraq and has already secured a contract with state Southern Oil Co., but US rival Weatherford has set the pace, with $400 million worth of Iraqi contracts already secured, four rigs in operation and plans for another four by the end of the first quarter. Views on the type of contracts that will initially be on offer vary. Some expect smaller-scale contracts as operators first look to overhaul or repair existing wells -- BP, for example, secured a contract for the giant Rumaila field with state China National Petroleum Corp. (CNPC), and has indicated that it will focus on fine-tuning existing production before starting work on increasing output in the second half of 2010. But Halliburton has noted that some of its customers believe "it may be easier based on the press of time to just bring the rigs in and drill new wells."
The looming upstream boom in Iraq raises a couple of questions, the first over who is most likely to benefit. Last year's licensing rounds saw many state firms fare better than the majors, and services firms from China, India and elsewhere in Asia can similarly be expected to compete aggressively with the Western engineering giants. CNPC will also be the operator for the Halfaya field, and is likely to use cheaper Chinese drilling crews and oil-field workers to help keep costs down on that field and possibly on Rumaila, too (PIW Jan.18,p1).
The second question is over how upstream costs will be affected. With huge expansions also taking place in Brazil and Australia and a nascent revival in Canada's oil sands, the pieces are in place for another squeeze on services and raw materials. Countering that, however, is the still-fragile state of the global economy, and the consequently uncertain outlook for oil demand and oil prices.