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Shale-gas expertise drives Schlumberger take over of Smith International

The $11bn take over of Smith gives Schlumberger greater access to North America's fast-growing shale-gas market and promises a shake-up of the oilfield services sector, Conal Walsh writes

SCHLUMBERGER'S take over of Smith International could presage further consolidation in the still-fragmented oilfield services industry. The $11bn all-paper deal follows rival Baker Hughes $5.5bn acquisition of BJ Services last year and gives Schlumberger access to world-class shale-gas drilling technology. This reflects the growing importance of unconventional gas and the trend towards offering bundled multi-service contracts.

Some oil majors have acquired the shale-gas resources of smaller specialist producers in recent months: ExxonMobil paid $41bn in stock for XTO Energy in December, a deal swiftly followed by Total buying into Chesapeake Energy's US shale assets in a $2.25bn joint venture (PE 2/10 p7). Schlumberger's acquisition of Houston-based Smith shows that trend being repeated in the services sector, but further consolidation is unlikely (see box).

The deal put a 35% premium on Smith's pre-announcement share price, a valuation that surprised some analysts, but that further demonstrates the importance Schlumberger places on acquiring staff and technology relevant to shale-gas extraction. Schlumberger was already by far the world's largest supplier of products and services to oil and gas companies. Its sales last year amounted to $22bn, compared with $15bn for Halliburton, its nearest rival. Schlumberger's deal with Smith will give it a combined global workforce of nearly 100,000.

The oilfield services industry's biggest players clearly see size as an advantage as they build their integrated project businesses, which provide bundled packages of products and services, along with on-the-ground management of work, in single turnkey contracts (PE 12/09 p22). Such contracts appeal to national oil companies, which lack in-house expertise and tend to outsource difficult work, and are popular in technically complex developments, such as shale gas.

"If you think about where the growth [in the energy industry] is right now, it's shale and it's deep water," says Roger Read, an analyst in Houston at Natixis Bleichroeder, an investment bank.

The shale-gas extraction process, for now, far more widespread and advanced in North America than elsewhere (PE 2/10 p4), combines horizontal drilling and hydraulic fracturing – which involves blasting sand, water and chemicals into a wellbore to break up compact rock – to improve the well's contact with the reservoir.

However, hydraulic fracturing has attracted the scrutiny of US lawmakers (see p27). The Senate energy committee last month requested information from Schlumberger and seven other companies about the chemicals they use in fracturing fluids and their potential effect on the environment and human health.

The champions of shale-gas extraction have long argued that shale gas makes a positive environmental contribution, mainly because gas, when burnt, is less carbon-intensive than oil and coal. However, some environmental groups say fracturing fluids contain ingredients that could leak into groundwater and aquifers. Senator Henry Waxman, chair of the energy committee, said that initial information suggested that Halliburton and BJ Services – although not Schlumberger – had used diesel fuel in their fracturing fluids between 2005 and 2007, which he said "potentially" violated a voluntary agreement not to use diesel that the industry had made with environmental regulators.

Shale-gas optimism

But the suggestion of environmental controversy has done little to disperse the optimism surrounding the US' shale-gas sector. Schlumberger's deal with Smith was announced just days after the Senate inquiry was launched, and Andrew Gould, Schlumberger's chief executive officer (CEO), spoke enthusiastically about shale-drilling (PE 11/09 p23). Schlumberger will benefit from Smith's shale-gas drilling technologies. Schlumberger, meanwhile, has the global presence to apply those technologies worldwide.

"The next breakthrough [in the oilfield services industry] will be through engineered drilling systems that optimise all the components of the drillstring, allowing our customers to drill more economically in demanding conditions," Gould said. "This step-change in drilling performance and well productivity must come from combining measurement and steering capabilities with the engineering and design of the complete bottom-hole assembly and its various components – including the drilling fluids and drillbit – with the hydraulic and mechanical environment in which they operate."

The deal gives Schlumberger access to highly rated drillbit technology – an area that it vacated with the sale of its Reed-Hycalog unit in 2008 – but also full control of M-I Swaco, the market-leading drilling-fluids venture it has owned in a joint-venture with Smith up to now.

Since M-I Swaco was formed, more than a decade ago, there have been rumours of a merger between Schlumberger and Smith. Those rumours intensified last year, when John Yearwood, a Schlumberger veteran of 25 years, was appointed CEO of Smith. The growing importance of shale gas, it seems, has helped convert speculation into reality.

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