Read the article, “Fracking Firms Face New Crop of Competitors: Schlumberger, Halliburton, Baker Hughes Struggle to Distinguish Themselves as Smaller Rivals Crowd the Marketplace,” below. Answer the following questions about the economic content of the article.
1) What sort of market structure does the hydraulic fracturing industry appear to have?
2) Which characteristic(s) of market structure lead you to the choice you made in question 1?
3) What has happened to the number of firms in the industry in recent years?
4) What does this suggest about the profitability of providing fracking to oil and natural gas drillers?
5) What does this suggest about the importance of barriers to entry in this industry?
6) How is the recent fall in oil prices likely to affect the demand for firms that supply drilling services (e.g. fracking)
7) In the white space below draw the firm cost curves for the oil drilling industry which uses the hydraulic fracturing firms and show how the facts in this article indicate that they have changed.
Fracking Firms Face New Crop of Competitors:Schlumberger, Halliburton, Baker Hughes Struggle to Distinguish Themselves as Smaller Rivals Crowd the Marketplace, wsj, BUSINESS, Updated July 9, 2013, 2:50 a.m. ET,by ALISON SIDER
So many companies have jumped into the hydraulic-fracturing business that the price of performing the key part of the oil- and gas-drilling technique has plunged in recent years, forcing fracking’s pioneers to play up new technologies to stand out.
Schlumberger Ltd., SLB +7.29% Halliburton Co. HAL +11.98% and BJ Services, a company that is now a subsidiary of Baker Hughes Inc., BHI +0.82% once did nearly all the hydraulic-fracturing work in the U.S., helping energy companies unlock previously unreachable oil and natural gas in shale formations and ushering in a boom in domestic energy production.
But their profits attracted competition and spurred the construction of new fracking fleets by independent companies. Now their share of the market for pressure pumping—the main step in the fracking process, in which water and other materials are injected into a well to break apart rock formations and unleash oil or gas—has dropped off as smaller, cheaper competitors have proved they could do similar work.
Halliburton, which does the most pressure pumping of any oil-services company, saw its North American profit margins fall to 18.4% in 2012 from 27.5% in 2011. During the first quarter, the Houston-based company’s North American margins were 16.3%.
The three companies’ share of the North American pressure-pumping market fell to 63% in 2012 from 85% a decade ago, according to Barclays BARC.LN +1.26%.
“The one thing we hate as a company is if you go for a bid and you have 20 people bidding against you,” said Baker Hughes Chief Technology Officer Mario Ruscev. “It’s not a good business model.”
Services companies sounded notes of cautious optimism at the end of the first quarter that pressure-pumping prices have reached their bottom and will begin recovering at some point this year, as more oil production means work for fleets of fracking equipment that had gone unused. If natural-gas prices rise, it could mean energy companies that slammed the brakes on drilling for gas during the glut resume operations, in theory boosting oil-field service companies’ margins along with them. But few expect a return to the early days of the shale boom, when demand for fracking services outstripped the supply of equipment available to do the work.
Smaller oil-field services companies such as Nabors Industries Inc. NBR +0.28% Basic Energy Services Inc. BAS +1.74% and Patterson-UTI Energy Inc.PTEN -1.66% have snapped up pressure-pumping outfits to expand their footprint. And new startups have proved that the barriers to the shale-gas industry, such as the cost of equipment and technical expertise, aren’t insurmountable.
The large, publicly traded oil-field-services companies are trying to counter the competition by using their larger budgets to build more powerful and efficient equipment. They also hope efforts to provide clients with more in-depth information about what is going on underground will set them apart.
In the early days of the drilling boom, energy companies focused on snapping up acreage and rushing to drill, but Mr. Ruscev said they are now more receptive to technical assistance that involves “more intelligence.”
“It’s all about risk. If we can come to them and prove that we can lower risk in a significant way, obviously they’ll pay for it,” he said.
Exploration-and-production companies’ shift toward shale reservoirs rich in oil rather than natural gas favors the larger services companies—those areas require more specialized chemicals and other technologies, as opposed to natural-gas shale that can be developed with “brute force” by smaller competitors, Barclays analyst James West said.
But the high-tech approach isn’t always rewarded. Schlumberger Chief Executive Paal Kibsgaard told analysts in April that U.S. customers haven’t been too enthusiastic about the company’s efforts to make shale-drilling operations go more smoothly or its investments in shale technology. Houston-based Schlumberger spends more on research and development than Halliburton and Baker Hughes combined.
In hopes of showing potential customers what it is capable of doing to improve an oil-and-gas company’s production, Schlumberger is entering a partnership withForest Oil Corp. FST +4.18% to jointly develop some of the company’s land in the Eagle Ford shale in south Texas.
Halliburton is rolling out initiatives aimed at using less equipment and cutting back downtime in order to keep fracking costs under control.
Its “Frac of the Future” initiative includes a powerful pump—used to inject rock-breaking fluid into shale at high pressure—that is expected to last longer and use less fuel than existing pumps. It also touts a solar-powered storage silo that takes up less space than the tanks that are typically used to store and mix the hundreds of thousands of pounds of sand and other materials that will be injected into a well as part of the fracking process.
Nick Gardiner, Halliburton’s strategic business manager for production enhancement, said the new equipment helps Halliburton do more work with less downtime, aiding fracking customers by getting jobs done more quickly. He said the equipment is catching on: 90% of the Frac of the Future equipment Halliburton has available is in use. “It helps us keep a technical advantage over competitors in customers’ eyes,” he said.
Write to Alison Sider at alison.sider@dowjones.com
A version of this article appeared July 9, 2013, on page B6 in the U.S. edition of The Wall Street Journal, with the headline: Fracking Firms Face New Crop of Competitors
