Cutting Costs Through Vertical Integration

Hello again, oil field services savants. Sorry for the break since my last post, but it is been hectic in the business world, both professionally and academically. Today, I want to post about vertical integration: what it is, why Schlumberger and other oil businesses are using them, and long-term outlook.

Schlumberger was one of the first companies in the industry to implement vertical integration into its supply chain management and cost structure. They first introduced the strategy aggressively in 2009, right after the major economic downturn due to the housing market bust in 2008.

By assuming all facets of the supply chain management process, the company has cut back on cost, but it remains to be seen whether or not the company will be able to self-sustain the operational burden. It will be interesting and compelling to see how the oil industry comes out of its current funk over the next six to twelve months.

Food for Thought: Under What Conditions Does it Make Sense to Reduce Efficiency?

It is an interesting concept, but when I first learned that there were situations that called for deliberately less efficiency for a company, it seemed counter-intuitive.

Does it make sense, in an uber-competitive environment that is, at this point in time, highly regulated for Schlumberger to lay off any excessive operations expenditures? The answer is...maybe.

The oil services industry consists of a marketplace that is drowning in competition. With large parent entities like Halliburton, Precision Drilling, and other field technologies servicing the industry, there is little room for market exit or entry. Instead, there is an arms race of sorts taking place where companies are acquiring smaller operations as a means of expanding its market share.

The looming issue that lingers, and recently disrupted Schlumberger's acquiring Russia's Eurasia Drilling, is government regulation. Without inserting too much politicizing or bias, I will keep this rant direct and to the point: companies participating in a capital marketplace are dis-incentivized to offer competitive and efficient services or products when government regulation or authority prevents them from doing so.

Efficiency is an ongoing process that requires adaptation and resources. So, it may be a time in this industry's history to stand pat and not make any drastic moves until regulatory protocols are updated.

Strategy for Oil Producers in 2015

The oil producing industry is a complex juggernaut to juggle, especially as green energies and technologies entities continue to develop and pick up steam, pun intended. According to several business strategy publications, the supply of petroleum in 2014 was twice as much as consumption, causing oil companies to adjust on the fly to lessening market demands. Besides the normal barriers that have existed for years, such as oligarchic control over the industry, poor public perception due to environmental considerations, and other market-fixing mechanisms that have cornered the consumer into purchasing high-priced gasoline, the oil-producing marketplace now faces unprecedented strategic concerns which may cause a shift in focus.

So, instead of sitting back and fixing gallon rates, "big oil" must now implement actual business strategy if it wants to continue amassing the egregious profits it has sustained for decades. The question remains, though, which strategies should be considered? How about, for starters, improving operational efficiency, which does not necessarily mean reducing costs and expenditures. Instead, companies like Schlumberger should focus on creating innovative ways to utilize their resources to ensure a long-term presence in the industry.

Russia to Join OPEC?

From Bloomberg Business, 09/10/2015:

Few things have more potential to spook the oil market than the prospect of Russia joining forces with OPEC. Speculation that such a move was afoot last month drove crude to its biggest three-day gain in 25 years.

Despite the market buzz, there are sound economic and technical reasons why this is unlikely to happen.

“Russia and OPEC have talked about cooperation in cutting production many times in the past, but the results of that were always dismal and disappointing,” said Nordine Ait-Laoussine, president of Geneva-based consultant Nalcosa and former energy minister of Algeria. “Russia has assumed that when oil prices go down, OPEC countries are in a weaker position and are more likely to be the first to cut its production, and they always did.”

Russia vies with Saudi Arabia and the U.S. for the title of world’s largest oil producer. 

Introduction to Schlumberger

Schlumberger Limited is the world's largest oilfield services company. Founded in 1926 in France(not Germany), and based out of France, Texas, and London, the company has continued to grow over the last ninety years by expanding its operations internationally and acquiring several research and operational entities to develop its market reach in the energy sector.

The company has experienced fluctuation in its value over the past five years which, for the most part, has followed the trends of the industry, an industry largely impacted by social, political, and legislative risks. Also, as environmental agendas and green initiatives continue to be pronounced in political and social landscapes, energy companies are affected accordingly. Finally, from an economic perspective, Schlumberger's operations are directly impacted by supply and demand as dictated by local production of respective markets as well as international coalitions of oil producing states; primarily, OPEC.

I look forward to exploring the company, both strategically and economically. I hope that this blog can provide further insight into the oil/petroleum industry.