Between a rock and a hard place, Big Oil still seeks returns from exhausted wells
WITH oil set to rise over $100a barrel in the second half of next year, according to Goldman Sachs, it's tempting to use pricier oil to explain Monday's trio of oil services industry deals, headlined by General Electric's purchase of Wellstream Holdings for £800m.
But the stronger underlying theme is rising interest in techniques for reaching oil that's hard to get at. Specialists want new capabilities -- and the majors want bigger partners. Wellstream and the day's two other takeover targets, PSN and Easternwell, all have expertise and technology in extracting energy from tricky places. Flexible pipes of the type UK-based Wellstream makes are essential as energy giants delve deeper into the oceans for oil.
PSN is a specialist in boosting production from old wells. And Australia's Easternwell knows how to extract coal seam gas -- once a nuisance that killed canaries in mines, but now a precious resource.
Demand for traditional drilling equipment remains slack despite rising oil prices because new discoveries of conventional fossil fuel deposits have been scarce. Instead, the oil services arms race has focused on how to get at difficult deposits.
In addition, rather than abandoning old wells and moving on, it has become worthwhile to invest in keeping older wells alive -- another technically challenging proposition.
So far, only about a third of the fuel in existing wells worldwide has been harvested, according to oil analyst IHS. This, rather than $90-a-barrel oil, is the main driver behind the latest rash of deals.
Even two of the biggest transactions of recent years -- Schlumberger's $11bn takeover of Smith and Baker Hughes' and the $5.5bn purchase of BJ Services -- had more to do with the two targets' expertise in cracking previously inaccessible energy out of rock than with buoyant oil prices.
For the smaller players in oil services, there's an M&A motivation beyond technology, too: specialists in hard-to-get oil will need to get bigger as demand for their services from Big Oil increases.
Of course, a bargain basement oil price would slow consolidation. At $50 a barrel, some of the more costly exploration and recovery methods cease to make sense.
But assuming no such collapse, companies in the oil services sector will keep exploring for new deals.