Oil and Gas Field Services, NEC

SIC 1389

Industry report:

Establishments that have complete responsibility for operating oil and gas wells for others on a contract or fee basis are classified according to the product extracted rather than as oil and gas field services. Establishments primarily engaged in hauling oil and gas field supplies and equipment are classified in a range of Transportation and Public Utilities Standard Industrial Classifications. Establishments primarily engaged in oil and gas machine shop work are classified in SIC 3599: Industrial and Commercial Machinery and Equipment, Not Elsewhere Classified.

Industry Snapshot

Companies categorized in this industry provide specialized services to assist in the excavation of oil and gas. These companies are used by drilling contractors to provide services in producing new wells and maintaining existing wells. The economic condition of oil field service companies is predicated on that of the oil and gas industry in general. Service-related work has been contingent on the number of rigs in operation, the price of oil and gas, and the demand for energy.

In August 2010, the number of rotary rigs drilling for oil and natural gas totaled 1,640, of which 636 were oil rigs and 992 were natural gas. Of this total, 1,620 rigs were inland, and 20 rigs were offshore (Gulf of Mexico; 7 oil, 13 gas); an additional 12 rigs were in inland waters. The number of rotary rigs operating in 2010 was significantly higher (up 672 rigs, or 64 percent) than 2009 rig activity. Almost all growth was seen in the oil sector, with the number of oil rigs increase year-on-year as of August 2010 by 364 rigs, with gas rigs over the same period increasing by nine rigs. As of July 2010, there were 3,032 rotary rigs worldwide.

Crude oil prices increased dramatically during the 2000s. In January 2000, crude oil sold for roughly $25 per barrel. By the beginning of 2006, prices had doubled to over $50 per barrel. Prices continued to rise during 2006 and 2007, and then, in 2008, as the global economy moved toward a recession, crude oil prices escalated even further. During the summer of 2008, per barrel prices climbed above $130. Prices declined during the closing months of 2008 and fell to around $50 per barrel for periods of 2009. In August 2010, crude oil price was approximately $73 per barrel. Natural gas prices were suffering from overproduction and a glut of imports in the late 2000s. Priced at approximately $13 per thousand cubic feet in 2008, by the first quarter of 2009, prices had fallen off to just $4 per thousand cubic feet, where they remained in mid-2010.

Domestic demand for energy peaked during the first decade of the twenty-first century in 2005, when the United States used 100.44 quadrillion Btu of energy, compared to 91.17 quadrillion Btu and 76.49 quadrillion Btu in 1995 and 1985, respectively. Usage in the mid-2000s represented a doubling of energy demand since 1963, when demand was 49.66 quadrillion Btu. However, due to the economic recession that plagued the nation in the late 2000s, energy demands declined in 2008 and 2009 (99.40 quadrillion Btu and 94.58 quadrillion Btu, respectively). Per person energy consumption in 2009 was at its lowest since 1958. Of the energy consumed in 2009, petroleum accounted for 37 percent, and natural gas liquids accounted for 25 percent.

Organization and Structure

Companies classified in this industry provide services intended to increase or improve well production. Services are provided throughout the life of the well, including the initial drilling, the completion phase that sets production, and the maintenance or stimulation of existing wells.

Casing and Cementing.
Casing and cementing services are provided when the well is drilled. Casing is a large steel pipe inserted into the well hole and cemented into place. Oil well cementing is a mixture of water and cement that is pumped into the space between the casing and the well bore, known as the annular space. The cement bonds the casing to the formation, providing structural support and directing fluid movement. Cementing also limits pipe corrosion, prevents natural gas blowouts, and aids in maximizing production circulation.

Testing Services.
After the well has been drilled to its determined depth, evaluations are made to determine if the hole will produce a sufficient amount of oil and gas. Downhole formations can be analyzed by five different methods: well logging, drill stem testing, potential testing, bottomhole pressure testing, and productivity testing.

Completion Services.
If it is determined that the well should be completed, the service company will lay production casing and complete the well, bringing the flow of liquid to the surface. Specific types of completion services depend upon the formation of the hole. The open hole and liner methods are available, although the perforated casing technique has become the most commonly used completion method.

Using perforated casing, the casing wall is pierced to provide holes through which formation fluids may enter the wellbore. These holes are created either by bullet or jet perforating. Bullet perforators are lowered into the hole and fired electronically from the surface. However, jet perforating, using shape-charge explosives, has become more widely used because it produces maximum penetration, especially in hard rock.

Well Stimulation Services.
Additional treatment to increase fluid flow rates may be needed to make existing and producing wells commercially viable. These treatments include hydraulic fracturing, acidizing the reservoir, and explosives. The rock type and the existing formation structure determine the selected approach.

Hydraulic fracturing is the use of specialized fracturing fluids blended with water to form a gel that is pumped downhole. This gel forces the petroleum reservoir to split open along the bedding surfaces and fracture zones extending beyond the wellbore. A greater reservoir drainage area is exposed to the wellbore, enhancing the flow of liquid. Reservoir rocks with poor permeability can be treated with acids in order to increase the wellbore's drainage area. Depending upon the structure of the reservoir, acidizing and hydraulic fracturing can be used together.

Originally used in the 1880s, explosives have reappeared as a modern well service method. Explosives are used with certain kinds of tight formations that do not respond to the other treatments. Explosive fracturing enlarges the wellbore by detonation either in the borehole or away from the wellbore.

Establishments engaged in this industry also often provide routine maintenance work on wells already in production. One of the most common well servicing operations is the artificial lift installation. When a well is first drilled, the fluid is expected to flow to the surface. In order to maintain maximum recovery from the well, however, most need some form of artificial lift to help raise the fluid to the surface. Types of artificial lifts include gas lifts, sucker rod pumps, hydraulic pumps, and submersible pumps. Maintenance service also includes replacing parts, repairing tubing leaks, working on malfunctioning downhole equipment, and providing well clean-out services.

Background and Development

When the price of natural gas fell in the United States during the early 1990s, operators reduced most of their drilling plans, which adversely affected the oil field service companies, already suffering due to the decline in the overall U.S. market. Many service companies began to diversify into other oil field services not directly related to production or well completion. Halliburton Company, a leader in the oil field services industry, purchased both 60 percent of Texas Instruments' Geophysical Services (GSI) and Geosource, another geophysical service company. The company also bought Gearhart Industries, a wireline service company, and merged it with Welex to form Halliburton Logging Services. In the second quarter of 1996, Halliburton announced plans to acquire Landmark Graphics Corporations, the leading supplier of integrated exploration and production information systems and professional consulting services for the petroleum industry.

Schlumberger Ltd., another industry leader, had also been investing in artificial intelligence technology. The company bought GECO to provide marine seismic analysis and acquired Prakla Seismos for onshore seismic operations. Schlumberger also entered a joint venture in a smart card and pay phone plant in China. At the end of January 1997, barely two months after beginning production, its factory in Hunan shipped its one millionth smart card. Pay phone production also reached volume status with an output of 1,000 units per month. Schlumberger Electronic Transactions, a unit of Schlumberger Ltd., supplied cards, terminals, and management systems across the entire range of magnetic and chip card applications and was considered the industry's leading single source supplier.

With nearly all the world's major energy fields already found, according to The Value Line Investment Survey in 1993, the future of oil and gas excavation would be dependent on the search for smaller pools. This effort, in addition to the extension of production from existing wells, increased the demand for oil field service companies. Therefore, those companies providing high tech services, such as three-dimensional seismography, extensive data gathering methods, seismic exploration services, and enhanced oil recovery skills found a competitive but productive market in the 1990s.

Rig Count.
In the early 1980s, the number of operating rigs in the United States rose to more than 4,500. By 2001, this had decreased to 1,156, and the number fell further in 2002 to 830. While this number rebounded in 2003, it remained well below that of the early 1980s. In 2003, 15 percent of rigs were drilling oil, while 85 percent were drilling for gas. Per exploratory well, the average volume of oil discoveries in 2002 declined 47 percent, and the average volume of gas discoveries increased 16 percent. According to the Energy Information Administration, crude oil production in 2002 declined 2 percent to 1.87 billion barrels. This trend is expected to continue declining, as levels in the early years of the first decade of the 2000s were 12 percent lower than average levels in the 1990s. Although the natural gas industry had been growing in the late 1990s, by the early years of the first decade of the 2000s, production began to decline. Dry natural gas production declined two percent between 2001 and 2002, while production of natural gas liquids declined one percent during that time period.

Price for Oil and Gas.
Natural gas prices fell to $2.95 per thousand cubic feet in 2002, compared to $4.00 per thousand cubic feet in 2001. After starting at $2.36 per thousand cubic feet in January 2002, gas prices fluctuated for most of the year until October, when they began climbing consistently. By December, gas prices had reached $3.81 per thousand cubic feet.

The wellhead price for crude oil fluctuated dramatically in the early years of the first decade of the 2000s due to unstable economic and political conditions in both the United States and the Middle East. Compared to a high of $23.02 in the fourth quarter of 1996, crude oil prices were down to $15.54 per barrel in December of 2001. The average price per barrel of $21.84 in 2001 rose slightly in 2002 to $22.51. Gasoline prices, as well, continued to fluctuate in the first decade of the new century.

Demand for Oil and Gas.
Faster economic growth in the United States boosted the demand for energy, including oil and natural gas. Energy consumption in 2002 grew by 1.03 quadrillion Btu to 97.35 quadrillion Btu. The United States remains the leading consumer of energy in the world. Daily oil consumption reached 19.8 million barrels, and daily dry gas consumption reached 62.7 billion cubic feet in the early years of the first decade of the 2000s.

Consumption of natural gas had increased throughout the 1990s, gaining 3.8 percent over 1992's rate to capture approximately 25 percent of the U.S. energy market in 1993. However, by 2002, natural gas accounted for only 24 percent of the U.S. energy market. Crude oil and natural gas liquids made up 39 percent of the market.

In addition to the domestic market, service companies based in the United States will likely encounter a variety of overseas market opportunities, particularly as the United States continues to rely heavily on energy imports. High-potential countries include those in the Commonwealth of Independent States (CIS) and the Asia-Pacific region.

In the mid-years of the first decade of the 2000s, the total number of operating rigs in the United States climbed from 1,255 in January of 2005 to 1,470 by year-end, with an average of 1,381 rigs in operation throughout 2005. During 2006, the number of rigs increased from 1,473 in January and continued to climb until reaching 1,635 in May and 1,738 in August. In 2006, domestic production of crude oil was an estimated 1.65 million barrels, a five percent decrease compared to 1.73 million barrels in 2005. Dry natural gas production remained relatively steady between 2005 and 2006, compared to natural gas liquids production that increased from 788 million barrels in 2005 to 811 million barrels in 2006, or three percent.

Natural gas prices steadily increased before skyrocketing to $10.35 per thousand cubic feet in October 2005 and falling to $8.66 per thousand cubic feet in January 2006. The wellhead price for crude oil surged throughout the mid-years of the first decade of the 2000s, and as a result, prices climbed to $59.64 in September of 2005 and $67.71 in July 2006.

About 11,700 establishments were primarily engaged in this $77.9 billion industry in 2007, with industry-wide employment at 144,309 workers. However, by November 2008, many oil producers stalled drilling projects, reducing their expenditures as the price of oil plummeted to $50 per barrel following the financial crisis. Therefore, oilfield services companies projects were expected to fall as well. Production of U.S. oil and gas drilling and support activities was projected to climb at an annual compounded rate of 6.4 percent between 2007 and 2012.

Current Conditions

In 2010, the Obama administration announced plans to introduce tougher environmental standards for oil companies that wished to drill in the Gulf of Mexico. The announcement came following the April 20 Deepwater Horizon explosion that killed 11 workers and led to one of the worst environmental disasters in U.S. history. Approximately 4.9 million barrels of oil leaked into the Gulf before the well leak was sealed. Also, reacting to the disaster, in May 2010, the Obama administration placed a six-month ban on all new deep water drilling. However, after a number of energy companies filed suit, a judge blocked the ban. In July, the Department of Interior announced a new ban, with some revisions and added justifications. Following this move, Texas filed suit to have the new ban removed, claiming the state should be part of the process that decides policy governing offshore drilling.

Well drilling and support services activities made headlines across the United States and the world--first for the well's failure, leading to the explosion, and second, for the support service industry's part in containing the leak and sealing the well for good. As oil gushed into the Gulf, industry experts and government officials desperately sought a way to temporary plug the well while relief wells could be drilled to permanently contain the faulty well. Although BP managed to cap the well on July 15, the relief wells, drilled parallel to the original well and then sideways, into the well base, provided a pathway to pour mud and cement into the well to seal it permanently. Drilling the relief wells took high-tech, precision equipment to successfully reach the well basin located three miles below the water's surface.

With the increasing amount of drilling in the late 2000s, the effects of drilling on the environment and surrounding community began drawing more attention. For example, in June 2010, a natural gas well in northeast Pennsylvania blew out, spewing 35,000 gallons of wastewater into the air for 16 hours before it was capped. Brine, used in drilling, was showing up in rivers, lakes, and streams, causing concerns of contamination. Although oil and gas companies had been exempt from the U.S. Environmental Protection Agency's Safe Drinking Water Act since 2005, heightened concerns led to the Obama administration to push for tougher environmental standards and reviews.

The recession of the late 2000s left the oil and gas industry on shaky ground, with both Halliburton and Schlumberger Oilfield Services, two top firms in the industry, reporting decreased revenues in 2009. However, in 2010, World Oil announced that most major operators were staying afloat, and most reported increased drilling activities during the year. World Oil anticipated that continued tight credit conditions would keep growth rates low and that most growth would come in the natural gas sector, even though most recently added rigs had been geared toward oil drilling. The natural gas sector had more price concerns, standing at just $4 in mid-2010, as production outpaced demand and an influx of imports. In addition, drill-related services were experiencing a shift in resource mix; the number of horizontal wells increased relative to the number of vertical wells, particularly due to the drilling of natural gas wells in shale reservoirs.

Industry Leaders

Halliburton Co.
Dallas-based Halliburton Company provides oil field services, construction services, and insurance as an underwriter of property and casualty insurance. Its oil field service and products group provides start-to-finish service in the drilling and production of oil and gas wells. One of the many companies within this group is Halliburton Services, the world's largest supplier of cementing, stimulation, water and sand-control services and related downhole tools.

Erle Halliburton founded his company in 1919, then called the Better Method Oil Well Cementing Company. He provided a service using cement to hold a steel pipe in a well, which assisted in the drilling and production process. Although this technique was not initially accepted, it has become a common practice throughout the industry. In 1921, Erle Halliburton moved to Duncan, Oklahoma, and in 1924, he incorporated the company as Halliburton Oil Well Cementing Company.

With the purchase of other companies experienced in the oil and gas markets, Halliburton built up its oilfield service business from the 1950s to 1970s. Two particularly important acquisitions were the addition of Welex, a well-logging company, in 1957, and Brown & Root, experts in the construction of offshore and drilling platforms, in 1966. Halliburton has operations in approximately 70 countries providing construction, drilling, and well maintenance services. It reported 2009 sales of $14.68 billion; 36 percent of revenues were generated in the United States.

Schlumberger Ltd.
New York-based Schlumberger Ltd. provides oilfield services, exploration services, well site and contract drilling, and computer-aided engineering services in more than 100 countries. In January 1993, Schlumberger purchased Dow Chemical's 50 percent interest in the Dowell Schlumberger group of companies. This group provides various oil and gas field services and is divided into the following entities: coil tubing, drilling fluids services, cementing, design and evaluation, and industrial cleaning.

Schlumberger was created by two brothers, Conrad and Marcel Schlumberger, who believed that the earth's surface could be measured by electrical resistance. The company began in 1927, when the Schlumberger brothers lowered an instrument down a well to assess the surrounding rock formation.

The company's oilfield services unit provides 75 percent of total revenues. Schlumberger reported 2009 sales of $22.7 billion. Schlumberger Oilfield Services accounted for 20.52 billion of total revenues.

America and the World

Companies from the United States have played roles in the discovery and production of oil in major fields in Mexico, Venezuela, Saudi Arabia, Kuwait, and Libya. While exploration and oil drilling have decreased in the continental United States and Alaska, all the major American oil companies have increased their presence overseas. The American oil and gas industry is inextricably linked to the world industry. Overseas operations have been particularly interested in service companies because of their ability to provide well workover and stimulation services to existing wells. Many countries have numerous wells in existence, but due to a lack of technology have not been able to maximize production. The U.S. Department of Energy (DOE) stated that the worldwide market for oil and gas exploration services would grow from $38.2 billion in 1990 to $1.3 trillion per year into 2010. Moreover, the DOE calculated that American vendors can capture $995 billion, or 74 percent, of that market. This would likely translate into substantial opportunities for companies providing support services to oil and gas exploration services.

The Commonwealth of Independent States (CIS), comprised of all the former USSR republics except the Baltic states, holds an estimated six percent of the world's proven oil reserves and 37 percent of its natural gas reserves. Older fields could offer tremendous opportunities for Western service firms to achieve considerable production improvements through the use of relatively straightforward procedures such as well workovers, equipment repairs, and regular preventive maintenance programs. Estimates of the number of wells in need of workover have been as high as 20,000. Area instability since the early 1990s has slowed progress somewhat, both in renovating old wells and in new drilling and pipelines. But the region was expected to experience enormous growth in the long term, and as of 2010, the CIS had the potantial to be the largest supplier of natural gas; the Yamal pipeline was 4,000 km in length, connecting Siberia with Western Europe.

The Department of Energy (DOE) also regarded China as an enormous growth market for oilfield service companies. Other areas of Asia showed great potential as well for the service companies. Spending by American oil companies was highest in Southeast Asia during the 1990s, indicating a vested interest in the region. Vietnam and the Philippines also showed great promise for oil exploration offshore.

Latin America and Africa also were growing markets. The natural gas resources in South America were largely underdeveloped, but the industry was expected to undergo increased development, incurring a need for skilled personnel to build and maintain rigs and pipelines. Several natural gas pipeline projects were inSouth America, the two most ambitious being the Bolivia-Brazil pipeline and the Argentina-Chile pipeline. In the early years of the 2000s' first decade, the African nations of Chad, the Ivory Coast, and Somalia, among others, were expected to join the market as oil producers.

© COPYRIGHT 2018 The Gale Group, Inc. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. For permission to reuse this article, contact the Copyright Clearance Center.

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