Schlumberger (NYSE:SLB) is focusing on the opportunity arising due to the increasing production from shale gas. China has a reserve of around 1,115 trillion cubic feet of gas. The current production from shale gas accounts for 1% of the country's natural gas production. The driver for this increase in natural gas production from shale gas is the increasing consumption and low-carbon energy development. For 2013, the consumption of natural gas is expected to be around 100 billion cubic meters, or bcm, which is a 15.4% increase over last year. China plans to increase the use of natural gas to around 230 bcm by 2015. This is expected to increase the demand for Schlumberger's oil field services in China. The following two factors are expected to contribute to the demand for Schlumberger's services-- its presence in different shale producing regions and its operational expertise. This is going to provide a major competitive advantage to the company in participating in the growth of shale gas in China. Schlumberger operates in five major basins in the Central and Western part of China as well the Bohai Bay and the South China Sea.
Operationally, Schlumberger's products and services have been able to increase productivity from the shale gas fields in the Ordos Basin. The Ordos basin is the second largest basin in China with a proven estimated reserve of around 10 billion tons. In the Ordos field, Schlumberger, in collaboration with PetroChina (NYSE:PTR), has been able to increase the initial production, or IP, of wells by around 3.6 and 4.4 times at its two pilot wells. Recently, PetroChina discovered a vast amount of shale gas in the Sinchuan province. PetroChina has drilled around 20 wells in the region with an average of 10,000 cubic meters of gas per well per day. I expect Schlumberger to benefit from a collaboration with PetroChina.
Schlumberger is making China the center of its global operations. The company's Quingpu Product Center, or QPC, is located in Shanghai. A new facility has a workspace area of around 40,000 square meters in addition to the existing facility of 13,000 square meters. The products manufactured here are mainly completion related, used in well completions, connections, measurement, and control. 75% of the valves sold by Schlumberger will be manufactured at the QPC. This manufacturing unit is expected to provide cost benefits to the company in the coming quarters. One source of the cost benefit is the cost competitiveness of China. China is going to lead in cost competitiveness during the next five years, through 2018, with a score of 10 on the Global Manufacturing Competitiveness Index.
Taking the lead in North America
Schlumberger continue to focus on the North American markets by focusing on asset utilization and operational efficiency. The following graph shows the company's operating margin in the North American region compared to its competitors.
The rig count in North America is around 2,208 compared to last year's rig count of 2,217, indicating a reduction in the rig count. However, rig counts showed an upward trends since November this year because of increasing horizontal drilling and hydraulic fracturing activity in the Permian Basin, Texas. In the U.S., the weekly rig count increased by seven, reaching 1,782 for the week ending in December 13 this year. In Canada, the rig count increased to 426, an increase from 418 last year. This shows that there will be a healthy demand for the oil field services across North America. I expect this would create a revenue opportunity for Schlumberger's oil well drilling services. The following chart shows the ranking of Schlumberger's services and products from a study done by Spears.
Additionally, the oil companies have been looking for efficiencies in well drilling. On average, each North American rig drilled around 5.4 wells during the third quarter, which is an increase from 4.7 during the first quarter of last year. This increase in drilling efficiency will likely drive demand for more oil well services because these services enable oil operators to shorten the time between drilling wells, increase the width of drill holes, and increase the reach of horizontal wells. This focus on efficiency is likely to create more demand for services like Schlumberger's HiWAY. HiWAY is a well fracturing service used for extraction of shale oil and gas. This service has been able to increase oil production by 20% and reduce proppant consumption by 40% in the fracking process. The increase in services for greater efficiency isn't limited to Schlumberger. Halliburton (NYSE:HAL), an oilfield services player, is also focusing on services like CYPHER, which would increase productivity of oil and gas wells. In major oil and gas basins in the U.S., CYPHER service was able to increase production 27% in the Utica formation, 24% in the Bakken formation, and 29% in the Niobrara formation.
Ahoy! Growth Ahead
Schlumberger has a major footprint in the various shale formations, which is likely to give the company a major advantage in the coming quarters. A major factor is China's plan to shift towards more consumption of natural gas. Schlumberger has been able to increase productivity of oil wells with the application of its technology and services in collaboration with PetroChina. Schlumberger's footprint in China and its enviable track record could boost the company's operation in the coming quarters.
In North America, the oil producers are focusing increased efficiency and increasing their asset utilization. Schlumberger has been successful in increasing productivity of wells with the application of its product. This is likely to create more opportunities for Schlumberger in the coming quarters as oil operators focus on efficient production.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.