Disrupting the Business Model – when Partners become Competitors

News that Schlumberger is investing in its clients’ projects has resurrected an idea that could disrupt the traditional E&P business model. David Finlayson & Peter Smith look at the pros and cons of the initiative and what it means for careers and corporate culture.

Back in the 1920’s “vertical integration” dominated: oil firms kept everything in-house. BP’s international operations had the full suite of oil field services: a drilling operation would have BP cooks, plumbers, and electricians on the payroll as well as drillers, engineers, and geologists. BP made their own geophones and conducted   geophysical surveys processing all the data. They analysed all rock samples in house. Papua New Guinea data would find its way back to the ‘boffins’ who worked in the Sunbury labs (now the site of BP’s global HQ).

Over time, oil field services became ‘Outsourced’. Specialist companies grew across the sector. Their competitive advantage was developing and owning IP relating to oil field services, together with the scale to deliver. Today, IOC’s own and manage oil fields, who hire in these services as required. They have all the information on the field and their “competitive advantage” lies in their own unique view of the field or prospect.

That “advantage” is deployed when bidding for other assets, either for exploration or production. They compete with other oil companies. Bid-offer spreads suggest that prospect value depends primarily on the strategic fit with the buyer’s portfolio; but the buyer’s culture and the skills and opinions of key individuals or departments will also play a role.

Service companies have grown into mighty organisations. They have immense financial resources and cross-sector oil field competencies, above and below ground. So why can’t they own and manage oil fields themselves? No technical reason at all. They have the engineering and logistical muscle, and the big oil companies have outsourced all the specialist knowledge.

So just as they try to stabilise after the oil price crash, do the IOCs face further disruption to their business with their suppliers turning into competitors? Possibly: it’s happened in other industries (think IT). It would be a rash CEO who did not see it as a potential threat.

Culture and client loyalty

But of course for the service companies it is not simply a question of technical capability. They have two major considerations. First, the culture of calculated risk-taking and decision-making that is common to E&P firms is not always present in oil field service companies. Second, they will be competing with their own clients: at present they will work right across a basin for multiple oil companies – these clients may be less willing to take them on as a supplier if they are also competing for resources in the same basin.

In the current downturn it’s tempting for service co’s to generate additional business by taking equity to “enable” E&P projects to progress: but are they prepared for the trade-off of increased financial risk and the potential to antagonize their customer base?

What are the implications of this for management careers in service co’s? How can service companies develop a full “Owner/Operator“ view of prospects? We think there’s huge potential in this initiative for all parties. For individual managers it’s an opportunity to develop skills and knowledge to enable them to move more easily between supplier and operator firms. For service companies and operators, it could bring fresh perspectives to running E&P projects and spur much needed innovation.

Can Schlumberger pull this off now in 2017? We think it is possible through well-managed JV’s, together with their legendary attention to the adequacy of sub-surface data. Or perhaps Schlumberger could take over a ‘BP’……

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