Schlumberger is pushing customers to start paying higher prices for its services as oil markets show more signs of recovery.
Through the prolonged downturn that began in mid-2014, oil producers have lowered costs by anywhere between 30-40pc. About half is through improvements in technology and efficiency, which will become part of their regular business operations. The remaining has come from discounts oilfield service companies offered to retain share in a shrinking market, industry analysts say.
But many producers, like Hess and Continental, say almost all the savings in cost have been through improvements in technology and very little is on account of discounts. This implies the road to a recovery in service fees for Schlumberger and its peers is not going to be easy.
"While there is a general understanding from our customers that pricing will have to increase, there was no material movement during the quarter," chief executive Paal Kibsgaard said in the company's earnings call. "But with the recent increases in oil prices, the basis for these discussions has now strengthened."
Companies such as Pioneer Natural Resources, Devon and Chesapeake are gradually stepping up their capital expenditures (capex). The US drilling rig count has risen by nearly 37pc since the low of 404 touched in end-May — its weakest in at least three decades — providing ample evidence of a more confident market outlook among producers.
Amid that improvement, Schlumberger will only take up projects going forward that meet its "financial return expectations," Kibsgaard said. "Currently a noticeable part of our contracts do not meet these financial return criteria and this is our starting point," he said.
Schlumberger also plans to put in place "proper payment schedules" in line with the terms and conditions of its contracts to recover past dues and "to address payment delays we today are seeing from many customers around the world," he said.
Schlumberger's views on the recovery in the market were shared by the world's second-biggest services provider, Halliburton, which earlier this week said North America is leading the recovery in drilling activities. On pricing for oilfield services, Halliburton said it is beginning to see "small increases" in different basins, but still "will describe it overall as a brawl," president Jeff Miller said.
Schlumberger is also working with its customers to improve technology so as to ensure that overall drilling and completion costs remain low. Citing an example, Kibsgaard said it drilled an 18,500 ft-long lateral on a well, the longest on record, for a customer using a rotary turbo system called PowerDrive Orbit. Older lateral wells are typically about half of that, with the industry pushing toward a 9,000-10,000 ft length. The new system has already been sold out and Schlumberger is adding new capacity from overseas.
In its international market, Schlumberger expects solid growth, year-on-year, in the Middle East and Russia in 2017. Latin America and Europe and Asia will also see an uptick but that is going to be from third-quarter levels. "The only place where we don't see any signs of recovery at this stage is in Asia," Kibsgaard said.
In Venezuela, the company is in discussion with state-owned PdV on a new contract model, which will include a payment assurance mechanism. Its operations remain largely shut, barring work it does for international oil company joint ventures in the Orinoco belt, known in Spanish as the Faja.
"We are optimistic that this contract will be finalized in the coming months and that operations could start in the first quarter," he said.
