This year has been particularly harsh for oil field services companies as they continue to battle the effects of low oil prices on their business. Most of the major oil field services companies including Schlumberger, Halliburton and Weatherford have already slashed more than 20,000 jobs during this year and the numbers are still growing.
However, at a time when most companies are slashing their upstream budgets, India’s upstream companies are actually increasing their investments in a substantial manner. Oil and Natural Gas Corporation Limited, India’s state owned and largest upstream company, is set to invest close to $3.7 billion in six new major fields and around $2.73 billion in redeveloping the existing Heera and Mumbai High fields.
It is interesting to note that after straight decline in crude oil production for seven years, ONGC is set for an 11 percent increase in its crude oil output by bringing new fields into production. "We are investing heavily in marginal field developments, results of which have started to accrue. This year, our crude oil production is likely to be 24 million tonnes," said a senior ONGC official. Apart from this, the company also plans to invest close to $8 billion in developing the KG-D5 block of the country’s Krishna Godavari Basin. However, this investment, unlike the others, is yet to be approved by the ONGC board.
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What are the opportunities for the oil field service companies?
India has been one of the countries that has actually benefitted from low oil prices. By consuming close to 3.85 million barrels of oil per day in 2014, India is among the top 5 consumers of oil in the world. However, its current oil production (0.75 million barrels per day) stands nowhere near its consumption levels and the country imports close to 80 percent of its total crude oil requirement.
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Low oil prices have actually reduced the country’s massive oil import bill and current account deficit. The U.S. EIA even predicts that India’s demand for oil will increase to around
8.2 million barrels per day by 2040 while production might remain flat. Rapidly increasing domestic demand, reduced production from its maturing fields and low international crude oil prices are the three reasons why the state owned ONGC is so keen to invest in newer projects. This presents an excellent business opportunity for oilfield services companies in a rather depressed market.
“ONGC is very active. It’s normal for them [to continue with upstream developments], they are not cutting down on projects. India is one of the biggest markets now and we are bidding for contracts there,” Nitish Gupta of Swiber Holdings Ltd. told Rigzone. In fact, Swiber has been one of the most successful contractors for ONGC (this year) as it won orders worth almost $800 million.
It first acquired an Engineering Procurement Construction Installation and Commissioning (EPCIC) contract called Daman Development Project in February, then it got a Pipeline Replacement Project in March which was followed by a third job in April involving EPCIC of pipelines along with the modifications/repairs of platforms and jackets.
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The current Indian upstream market is also extremely lucrative for other oilfield services companies such as Schlumberger, Baker Hughes and Halliburton who have already worked with ONGC (and other Indian upstream companies) in the past on several projects. Schlumberger was the first oilfield service company to drill the first shale gas well for ONGC in the year 2011. Halliburton, Baker, Transocean and Schlumberger have won several contracts from Indian upstream companies like ONGC and Reliance in the past. These companies will definitely be keeping an eye on ONGC’s upcoming greenfield and brownfield projects.
Invest more, but pay less
The strategy of the Indian upstream companies has been to take advantage of the depressed market conditions and reduce the previously held contract rates with the oil field services companies. One of the best examples of this was the renewal of a drilling contract by Reliance Industries Limited with Transocean at a rate of $295,000 for three months. This rate was significantly less than the earlier rate of $395,000.
Moreover, upstream companies in India (especially the state owned firm) follow a strict ‘L1’ strategy to award a contract, where ‘L1’ stands for the lowest price of a ‘technically qualified’ bidder. This makes the Indian market relatively tough to operate as the client’s decision is purely based on the offer price and not the technology that is being offered. A bidder with a relatively inferior technology but lower price will be preferred.
In fact, ONGC in April had even initiated a process of identifying and attracting smaller fracking companies from the U.S. to compete with the likes of Halliburton and Schlumberger in India and thereby bring down the drilling prices. ONGC had outsourced a major portion of fracking to oilfield services companies like Schlumberger, Baker and Halliburton as it tried hard to maximize output from its aging fields.
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Will this affect India’s import volume?
India imported around 3.8 million barrels of oil per day and spent $112.748 billion on oil imports in the year 2014. According to estimates from the Indian petroleum ministry in June 2015, the country’s oil import bill could fall by as much as 21.7 percent to $88 billion this year mainly due to falling oil prices. If the current projects raised by ONGC are awarded without much delay and red tape, then India’s oil import bill could fall by a further 5 to 10 percent in the next few years depending upon the extent of discoveries and field development.
However, while this could somewhat reduce India’s import volume, the country’s huge appetite for oil would still require the development of several new fields along with redevelopment of the existing ones with latest drilling and logging technology. However, India’s policy of paying less and awarding the job to the cheapest contractor is definitely skewed and needs to be revisited by top officials if domestic production is to see any worthwhile increases.
By Gaurav Agnihotri for Oilprice.com
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