Schlumberger: Growth From Saudi Arabia And China

| About: Schlumberger Limited (SLB)
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Saudi Arabia: Going a long way

Saudi Arabia is one of the world's major hydrocarbon producers, with a daily production of around 9.7 million barrels of oil per day (mmbopd) in November 2013. The country is a major area of operation for Schlumberger (NYSE:SLB). Schlumberger's revenue from the Middle East and Asia increased by around 5% during the fourth quarter of 2013 year over year to $2.94 billion, constituting around 25% of total quarterly revenue. The production capacity of Saudi Arabia is around 12.5 mmbopd. Saudi Arabia intends to increase production to build up spare supply capacity of around 2 mmbopd. This production increase by Saudi Arabia is expected to increase the number of rigs from around 160 in 2013 to around 210 in 2014. With plans to increase rigs, drilling activity is also expected to increase there to meet production targets. This increase in rigs is required to boost recovery of the country's conventional hydrocarbon deposits to around 70%. Generally the recovery rate from reservoirs across the world is around 35%. Schlumberger has developed a large asset base in Saudi Arabia, with 21 rigs. Schlumberger has a strong presence in Saudi Arabia through its 49% stake in the Arabian Drilling Company (ADC) and operates high-performance rigs in the region.

The increasing rig count will lead to growth for the oil-field services companies in Saudi Arabia, resulting in increasing expenditure by Saudi Arabia's national oil company, Aramco. Aramco's capital expenditure budget between 2003 and 2013 increased from around $4 billion to around $40 billion to recover more oil from oil reservoirs. Schlumberger in collaboration with Aramco has already employed Oil Field Manager (OFM) to improve productivity and optimize production, which in turn increases the production life of the reservoir. The OFM increases productivity by standardization and automation of the reservoir's hydrocarbon-extraction process. As Saudi Arabia tries to increase its production output through reservoir optimization, the OFM service could experience higher demand in the coming quarters.

Chinese drilling could provide sustainable growth

During the fourth quarter, in China Schlumberger deployed StethoScope formation pressure-while-drilling technology for Energy Development Corporation, a joint venture between Sinopec and Noble Energy (NYSE:NBL) on an offshore well in the Shengli oil field. This technology has helped to develop an extra 55 meters of payzone, which was earlier neglected during evaluation of the well. Payzone is the region within the rock formation where hydrocarbon could be extracted. Earlier, Schlumberger increased oil production from the mature Shengli field by around 50%. As of 2012 China has an estimated 20.4 billion barrels of proven oil reserve (around 85%) mainly in the onshore basins. Schlumberger's technology in the Chinese oil fields is likely to create demand for its services, increasing productivity.

Further, China is increasing hydrocarbon production from its shale reserves across the country. According to China's 12th five-year plan (2011-2015), shale gas output is expected to increase to 6.5 billion cubic meters in 2015 with a capital investment of around $66 billion. At present, the shale gas output is small compared to the target output. In 2013, shale gas output in China was around 200 million cubic meters. With less than 150 exploration wells for shale gas exploration and production in 2013, China plans to develop its shale gas output in the coming quarters. It is expected that the production of shale gas is expected to reach around 1.5 billion cubic meters in 2014. China is expected to have around 1,100 trillion cubic feet of recoverable shale gas and has attracted companies such as Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B), Total (NYSE:TOT), and Eni SPA to explore these reserves. The increase in exploration by these companies could create demand for oil-services companies. Services from Schlumberger like EcoScope LWD and PowerDrive X5 RSS have been used in central China to develop a shale gas well. These two services helped evaluate the shale formation and optimize well completion, and these services could realize higher demand as production from shale increases in China.


Schlumberger has developed a leading position in Saudi Arabia by helping Aramco improve its oil-field productivity. Moreover, the company has a number of operating rigs in the region, and the initiative to increase oil production from various reservoirs in Saudi Arabia is likely to create demand for its services.

In China, Schlumberger has helped develop mature fields and enabled developing wells in the shale plays. With the increasing focus on shale gas output growth, Schlumberger could generate revenue from this region.

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.