Many oil service companies want to know how large their market is and how it will develop in future. To substantiate reliable market size numbers for the next years is a difficult task with large uncertainties. In addition, there seems to be different definitions of what “the market” is. The good news is: The market is likely larger than widely assumed.
By Erik Wold, Partner & Head of Technology; Jan G. Norstrøm, VP Technology
Many oil service companies want to know how large their market is and how it will develop in future. To substantiate reliable market size numbers for the next years is a difficult task with large uncertainties. In addition, there seems to be different definitions of what “the market” is. The good news is: The market is likely larger than widely assumed.
Defining the E&P spend market
Rystad Energy has thoroughly analyzed Norwegian E&P and oil service businesses. In Norway we find transparent and high quality reporting of investment data via Statistics Norway (SSB) and the Norwegian Petroleum Directorate (NPD). Based on our research the Norwegian oil companies’ costs and the oil service market (for 2010) can be broken down as shown in Figure 1.
A in Figure 1 shows the Capex, i.e. investments, totaling NOK 125 b. It includes all capitalized spend on projects, e.g. all exploration costs, all new facilities, all wells and larger modifications and upgrades. B also includes operating costs and is the total field license cost i.e. Capex + Opex for all fields, exploration blocks, pipelines and terminals. Opex includes operation related costs like operation and maintenance of facilities, salaries, tariffs and fees. Opex is NOK 59 b so that Capex + Opex = NOK 184 b. To get to the total costs for oil companies we also need to include non-license related costs like pre-license exploration, sales and administration, and non-operational costs. This amounts to NOK 34 b and shows that total costs of oil companies in Norway sums up to NOK 218 b, shown as C in Figure 1.
However, all oil company costs are not purchases from oil service suppliers. Non-purchase costs include salaries within the oil companies, tariffs for processing and transportation, cost of injection gas, and direct taxes like CO2 tax. Tariffs also include historical Capex costs. We find these cost elements both in the Capex, Opex and non-license related budgets, with NOK 8 b, 19 b and 32 b respectively. Subtracting non-purchase costs leaves us with the actual purchases, which we term “E&P direct purchases”. This is the sum of contracts the oil companies put in the oil service market. In 2010 it totaled NOK 159 b, shown as D in Figure 1.
However, the total oil service market is larger than the sum of the contracts because many contractors sub-contract parts of their scope to sub-contractors. In this case, both companies will report the sub-contracted volumes in their revenues, and the contract volumes are double-counted. The size of the market as seen from the oil service suppliers is the sum of reported revenues from these companies within the oil service segment. The difference between this total oil service market and E&P purchases, often referred to as Supex (supplier expenses), was NOK 26 b in Norway in 2010, resulting in a total oil service market of NOK 185 b, shown as E in Figure 1. Note that contracts (D) won by non-Norwegian suppliers will not contribute to the Norwegian total oil service market (E).
The Opex in Norway amounts to NOK 59 b. It is interesting to note that out of the NOK 59 b budget, 40 b relates to purchases from suppliers. Thus, 25% of E&P purchases are from the oil companies’ Opex budget. We have seen arguments that Opex purchases should not be included in the oil service market, and we disagree. Most oil service companies are not concerned with what budget funds their services, and Opex purchases take up a large part of their capacity, including man power, which is a scarce resource. On the contrary, we have noted that “Capex-focused” companies may miss out on business opportunities in the operational phase – leaving the others to harvest in their natural aftermarket.
Example: Global E&P spending analysis
Figure 2 shows the result of the E&P spending analysis “Barclays Capital’s Global Capital Spending Update”, a best practice study. Barclays Capital uses the term “Global E&P spend”, but specifies this market to be the sum of development and exploration Capex.
In Figure 3 we compare the 2010 numbers in Figure 2 with Rystad Energy’s estimated market sizes. Barclay estimates the market for 2010 to $458 billion, to be compared with our “purchases from Capex” estimates at $548 billion (A in Figure 3), which is 20% higher. In B) we have included estimated Opex purchases which gives a total spend of $675 billion. This is the best global spend estimate for the oil service industry.
The main reason why Rystad Energy’s Capex numbers are higher is our more thorough coverage. Barclays analysis is based on top 420 E&P companies. Rystad Energy’s estimates are based on UCube, our own complete global asset database, including full portfolios of 3,200 companies.
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If you would like to hear more about this topic or to schedule an interview, please contact Erik Wold, Senior Partner at +47 93 05 93 73, erik.wold@rystadenergy.com or Jan G. Norstrøm, VP Technology at +47 92 06 00 74, jan.norstrom@rystadenergy.com.