Schlumberger and the Perpetual Cycle of the Oil and Gas Industry

MBA 617

October 20, 2016

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History

The story of how Schlumberger was created began during the 1900s.The company has its

origins in France, where the Schlumberger brothers Conrad and Marcel grew up. Conrad and

Marcel both wanted to be scientists, and their father fully supported their ambition. The brothers

were then sent to Paris to further their education. Conrad became a physicist, graduating from the

École Polytechnique in 1900, before studying at the École des Mines (First Well log). Marcel

became an engineer, graduating from the École Centrale Paris in 1907(First Well log). While

studying Conrad took an interest in earth sciences, especially in prospecting for metal ore. In

1910, Conrad started tests on what was to become known as wireline logging (First Well log).

Conrad’s wireline technique could provide extra information meant for locating subsurface

structures that could form traps for minerals such as oil and gas. Wireline logging is still a

common practice that Schlumberger and many other service companies still use do today. In

1919, the Schlumberger brothers decided to become business partners (First Well log).

The next decade demonstrated the Schlumberger’s commercial potential. In 1920, Conrad

and Marcel opened their first office in Paris (First Well log). Conrad and Marcel then spent the

next three years conducting geophysical surveys in Serbia, Canada, South Africa, Congo and the

USA, as well as Romania (First Well log). They then began carrying out subsurface surveying in

Argentina, Ecuador, India, Japan, the Soviet Union, Venezuela and the USA. During this time

the brothers continued to innovate, and created new well logging technologies such as the

Spontaneous Potential log and the continuous recording hand recorder. In 1940 Company

headquarters moved to Houston, and the company of Schlumberger had set up the workings for

one of the most well-known and innovative Oil service companies (First Well log).

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Organizational Description

Today Schlumberger is one of the world’s largest oil service companies. According to

Schlumberger’s website, they work in more than 85 countries and have approximately 100,000

employees (Backgrounder, 2016). Schlumberger’s major work activities involve providing

service and products to companies that are in all stages of an oil wells lifespan. Schlumberger

does not own any oil wells they just facilitate services and products. Schlumberger is a vast

organization that is spread throughout the globe. They manage themselves through 35 Geo-

market locations that are handled in four regions, North America, Latin America, Europe &

Africa, Russia, Middle East and Asia. Their principal executive offices are in Paris France,

Houston US, London England, and the Hague Norway (Backgrounder, 2016). Schlumberger

handles all aspects of the oil industry, reservoir characterization, drilling, production, and

processing to the oil and gas industry. Schlumberger is most well-known for their innovative

products and service techniques, thus they are heavily devoted to R&D. They have research

centers is Massachusetts, Cambridge, Moscow, Stavanger, and Dhahran (Backgrounder, 2016).

Schlumberger’s goals are to invent, design, engineer, and apply technology to service

customers in order to help them find and produce oil and gas in a safe and efficient manner.

From Schlumberger's main website their mission and vision is "Making the most of our unique

assets, Schlumberger is committed to providing services that enhance and optimize our

customers' performance." Schlumberger’s core values are that “people thrive on the challenge to

excel in any environment. Their dedication to safety and customer service worldwide is our

greatest strength. Our commitment to technology and quality is the basis of our competitive

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advantage. Our determination to produce superior profits is the cornerstone of our future

independence of action and growth.” (Quick Guide Schlumberger, 2014, P.5).

Since Schlumberger is such a large company they have many stakeholders. According to a

current employee, Austin Hinzman Field Specialist, all of Schlumberger’s employees are given a

retirement fund in the form of a 401K. Hinzman further says that one also has opportunity to

form multiple investment options within Schlumberger. Schlumberger is a publicly traded stock

company of whom the top five investors are Fidelity, BlackRock, State Street, Dodge & Cox,

and Vanguard, who together own 21% of Schlumberger (Maxfield J., 2016).

Schlumberger operates over the entire globe, thus their organizational structure must work

accordingly. Many of their departments focus on a certain continent, and then branch out their

base of operations from there. Schlumberger’s organizational chart can be seen in Appendix A.

The organizational chart shows that Schlumberger has a dedicated integrator, Abelardo Gallo,

whom deals with operation integrations within the Cameron, reservoir characterization, and

drilling groups. Schlumberger deals with a highly complex and dynamic environment thus they

tried to implement a complex and somewhat organic structure. Schlumberger's structure is a

matrix one that CEO Kibsgaard implemented in 1998 (Kibsgaard, 2011). In their matrix setup,

field operations are overseen and supported by both the global product line as well as by the

local Geo-Market organization (Kibsgaard, 2011). The matrix structure allows them to build on

their knowledge management system to share technical expertise across regions and products. In

Kibsgaards words, "Transforming a set of standalone product lines into a matrix framework

takes time, because it requires a step change in teamwork and trust, more clarity of roles and

responsibilities, as well as common business processes and systems. The transformation is also

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complex in terms of balancing management power as the product lines need to give up some

control of their business in order to be part of something bigger" (Kibsgaard, 2011, P.52).

Having over 100,000 employees within 85 different countries, means that Schlumberger has

a various diverse culture. Schlumberger offers various employment opportunities especially for

the STEM degrees, finance, HR, Supply Chain, and internships For the most part Schlumberger

is very professional and serious. CEO Paal Kibsgaard is also very open about the company, and

speaks often about their current research and future plans. Field Specialist Austin Hinzman said

that most of the employees act professionally, and similar to any other office position, but when

you are out in the field the job has a fun yet serious nature to it. However Hinzman says there is

always a looming fear of being laid off. Schlumberger had recently laid off 8,000 workers in

2016 (Triepke, 2016). Hinzman said that a couple of workers who got laid off were from his

crew, thus he as well as everyone else knew that there was a possibility.

Oil companies have a very negative connotation associated with them on environmental

issues therefore Schlumberger is actively pursuing to distinguish itself as an environmentally

conscious company. They know of the negative images, thus they have implemented new

technology such as the Ecolibrium environmental conformance technology. Ecolibrium enhances

chemical treatment, when doing cement jobs in a well, while minimizing the environmental

impact (Schlumberger, 2016). They have also developed a new program “Global Stewardship”

that tracks the company’s record on managing environmental risk, operational integrity,

chemical transparency, air emission, water use, waste management, and energy efficiency

(Schlumberger, 2016).

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Although Schlumberger is one of the top service companies in the industry, there is high

competition. Their main competitors are Halliburton, Baker Hughes, Saipem, Transocean, and

Fluor (Ball, J., & Davies, H., 2015). There have been talks about a merger between two of the

largest service companies Halliburton and Baker Hughes. This merger would be a grave threat,

because they would be the largest service company in existence and ultimately wipe out any

competition around the world. If Halliburton were to buy Baker Hughes it would strengthen its

offerings in areas such as production chemicals, oilfield services tools, and directional drilling

(Nathman. D, 2015). The deal would enable the combined entity to hold a dominant position in

some of its key product markets, such as pressure pumping, completions equipment, and

cementing services (Nathman. D, 2015). Schlumberger needs to be wary of such talks, and

prepare themselves accordingly if such a merger were to come to fruition.

Since Schlumberger’s customers are dealing with a volatile commodity such as oil, the

market is bound to be complex, unstable and uncertain. Not only must Schlumberger deal with

these issues but being a global organization means they must also deal with the turbulence

caused from the political and international environment. Currently they were able to adapt to

their environment because lowering their service price and by offering new methods/technology

that would allow their customers to produce oil in a more efficient matter. Although they adapt

well in that sense, they still could not escape the oil downturn and reported losses this past

quarter as well as having major layoffs.

The unpredictable nature of the oil industry has provided many ups and downs throughout its

existence. Thus it is extremely difficult to plan accordingly and see these future downturns since

the environment is so complex, countries such as Saudi Arabia can impose their own prices by

flooding the market with oil. New technologies such as fracking, can dictate the price by

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allowing easier production of oil and thus allowing small companies to produce oil and flood the

market as well. Many unpredictable occurrences such as those can occur in the oil industry, thus

Schlumberger must adapt as the industry goes through this.

The Oil business comes with its fair share of government regulations, especially within the

United States. There are many bureaus and agencies that regulate the oil industry such as the

Environmental protection Agency, Bureau of Land Management, Bureau of Safety and

Environmental Enforcement, Bureau of Ocean Energy Management, Federal Energy Regulatory

Commission, and the Pipeline and Hazardous Materials Safety Administration (Oil and gas

regulations, 2016). However, Schlumberger was recently on trial for violating such regulations.

Schlumberger violated the International Emergency Economic Powers Act (IEEPA) by doing

illegal transactions and engaging in trade with Iran and Sudan. They paid $232million to the US

government and are on a 3-year corporate probation period (Schlumberger Oilfield holdings,

2015). This is the first major violation for Schlumberger in the U.S thus this may not prove well

for Schlumberger and U.S relations in the future.

Problem Statement

Currently Schlumberger is going through a period of anticipation of the oil industry to return

to a more profitable situation. They have incurred losses with a second-quarter loss of $2.16

billion, compared with the profit they earned a year earlier of $1.12 billion, and layoffs such as

the 8,000 layoffs that occurred this year (Wethe. D, 2016). The oil industry itself has slashed

more than $100 billion in spending and 250,000 jobs last year to keep pace with crude prices that

have fallen (Wethe. D, 2016). The total number of U.S. oil and natural gas drilling rigs working

in the quarter fell to 698, down more than half from 1,840 rigs at the end of 2014 (Wethe. D,

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2016). CEO Paal Kibsgaard is still confident in the future of the oil industry, and believes that

the worst of the downturn has already passed (Wethe. D, 2016). For the most part I believe

Schlumberger are currently doing a good job in how they are handling the downturn, with their

current model. They essentially turned to their strengths of innovation by investing over $1

billion in R&E in the last one year and have also acquired well known oil developing companies

such as Cameron (Team. T, 2015). However, even though they are investing in their strengths,

they are still being heavily affected by the downturn. Although in the near future I believe

Schlumberger will gain back its momentum, due to the fact that the price of oil will inevitably go

back up as it usually does, the price will more than likely never go back up to its previous high of

over $100 per barrel. With this in mind, Schlumberger should know that the price of oil will

continue to be on this up and down cycle, but the previous high price of oil will never be reached

the following year. Therefore, I believe Schlumberger must change its organization in a few

ways in order to be profitable throughout these life cycles.

Critical Analysis

Schlumberger’s large dependence on oil is only one of a few other issues the company

has currently. Another issue is that the company is having an increased threat of competition. As

companies such Halliburton and Baker Hughes continue to grow and develop their technologies,

such as Halliburton’s new leak detection technology that would allow their customers to detect

leaks that are hundreds of feet down the well which would help the environment and save their

customers thousands (Duff,2016). Halliburton and Baker Hughes were also in talks about a

possible merger, which would potentially be the largest service providing company.

Schlumberger is currently at the top as far as service companies go, but in order to stay there

they need to acknowledge that the competition is gaining momentum. Currently all of the service

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companies are at a stand-still, but once oil prices increase the potential for further acquisitions

from these companies are definitely possible.

Another issue Schlumberger currently has is its image. They have just been under fire for

their U.S violations with their dealings with Iran and Sudan. They are also part of an industry

that is not the most environmentally friendly in the eyes of many. Schlumberger is trying to curb

this way of thinking with their newly implemented Global Stewardship program and their

Ecolibrium technology, but they need to expand their way of thinking. These programs are not

differentiating Schlumberger enough from the industry and their competition. When people think

of the industry, and of Schlumberger, they will have these negative connotations in their head.

Schlumberger is currently doing the bare minimum in promoting a positive image in this

department.

Recommendations

Although Schlumberger is a very efficient and effective organization there are still a few

areas where I think they need to either increase focus or add to their company. My number one

recommendation is for Schlumberger to expand, and venture into alternative energy. Their issue

is that they have all of their eggs in one basket and are basing all of their profit solely on the oil

industry and on no other outside energy. They already have a lot of infrastructure set up around

the world currently, and are heavily invested in R&D. Their name in the industry is already the

standard for innovation. Robert MacKenzie, an analyst at Iberia Capital Partners and a former

employee of Schlumberger said, “You could almost say Schlumberger is the Apple of the oil

fields, the high tech company, they’re ubiquitous.” (Ball, J., & Davies, H., 2015, P.35). By

taking this step Schlumberger could potentially never incur a lull in the oil cycle. Schlumberger

could also lead the charge in these alternative energies, if they invested enough into it. Even

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though Schlumberger has been able to survive these downturns, the need for expansion into new

energy markets, to facilitate that need for service companies in nuclear, solar, wind etc. may be

what Schlumberger needs to relieve them from these low periods within the oil industry.

In order to implement this recommendation I believe Schlumberger should acquire the

top companies in the alternative energy markets just how Schlumberger acquired companies in

the Oil industry who were creating new innovative technology. My first suggestion would be to

start with hydro and nuclear electric technologies since they are the next largest energy providing

industries (World Energy Use, 2016). Possible company acquisitions are BC Hydro, RusHydro,

Entergy Corp, and Exelon Corp. These companies would allow Schlumberger to have a top name

associated with them, along with the top of line technology and engineers who are familiar with

that area of engineering. After they acquire these companies they can slowly build their market

in these fields, and create new products. Just as Schlumberger did with the oil business from the

beginning, they will have to start small and grow gradually. Starting in the U.S and gradually

branching out would be a good idea. This would also build upon Schlumberger’s image, because

now they would not only be thought of as an Oil company. Once Schlumberger has built enough

technology and momentum with hydro and nuclear, I would suggest them to branch out further

and continue on with solar, wind and geothermal energies. They will have to add a completely

separate department in their organizational chart to accommodate for each of these new energies.

Although I believe Schlumberger should branch out I think they should always keep a solid base

with their roots in oil, since they have always done well with it and I do not believe that will

entirely die anytime soon. I do believe investing in alternative energies in the near future would

be wise. However, I do not think Schlumberger should invest in alternative energy in the next

two years. They should first try to recover from the current oil downturn and try to become

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profitable once more. When they are in a steady position then I would begin to acquire

companies.

Another recommendation is for Schlumberger to acquire Halliburton or Baker Hughes.

Currently Baker Hughes and Halliburton are the only companies that pose a threat to

Schlumberger, and if they were to merge this could prove to be catastrophic to Schlumberger.

Schlumberger has already acquired many small companies in the oil industry that have created

new technology for the oil industry, and these companies have proven to be invaluable to

Schlumberger. If Schlumberger were to acquire Halliburton of Baker Hughes, they would

ultimately be the largest service company and would essentially not have any competition. My

suggestion would be to acquire Halliburton though. The reasoning for this is because they have

proven to have a better R&D department, and have created that new leak detecting technology

that could prove to be invaluable. Baker Hughes has not made many large leaps in technological

contributions they have had a steady and proven rate of success, but nothing major. Therefore, I

believe Halliburton would be the preferred choice. This would be an extremely large merger,

thus Schlumberger will probably have to handle it a lot differently. I suggest they have

Halliburton adapt to their values, goal, organizational structure, etc. I think by having the

company as one solidified unit would be preferred. The merger would also further increase

infrastructure, customers, as well as technological developments. This merger will of course will

cost a lot and take a lot of time, thus I would wait until the oil downturn rebounds.

My last suggestion for Schlumberger is to revamp their HR department. They are currently

having issues with their image due to their unsanctioned dealings with Iran, and their image as

another oil company that is not environmentally friendly. I think the first recommendation I had

would help their image tremendously, but Schlumberger could also market themselves better

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within the U.S. Many people do not understand the oil industry and how the technology that is

being used to extract the oil from the ground is doing it in a safe manner. Schlumberger’s HR

department needs to have a campaign of informing the public in the U.S, as well as their

employees, on the process of producing oil. Schlumberger is already doing a fairly good job with

their environmentally friendly program, but Schlumberger needs to inform and reassure the

public of their commitment to safety. Schlumberger could implement this through an integrator

or team that specializes in informing the local public or community, where they may be doing

business, of the process that will occur. This same team could further spread this information on

the website. All of their employees could also have an orientation on the process that is being

taken to put safety and the environment in their values, this way their employees can inform

others as well. This leads me to my last suggestion, which is to add environmentally friendly to

their goals and vision. Currently they have a high importance on safety, efficiency, and

innovation, but saying that they are making an effort to step up their game environmentally could

help improve their image. I believe improving Schlumberger’s image would be a drop in the

bucket to improve their image, and could be implemented today.

Schlumberger is a well-established oil service company that has been in the business for a

while. They clearly have had great success with the business, and I believe they are handling this

downturn with the best of their ability. Their ability to create innovative technology, within the

gas and oil industry, is currently unmatched. That being said, I do believe that these

recommendations could help them improve themselves in the future. Oil is not the only source of

energy out there, even though it is the most prevalent, and will remain to be for a long time to

come, there is a growing market for alternative energy. Their competition is also growing fierce,

and anticipation of growth could occur very soon for them. They also need to differentiate

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themselves and reevaluate their values to include an environmentally cautious mentality. Overall

Schlumberger has great potential they just need to think outside the box a bit more.

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References

Hinzman, A. (n.d.). Schlumberger employees [Interview].

Backgrounder. (2016, January 1). Retrieved October 7, 2016, from http://www.slb.com/about/who/backgrounder.aspx

Ball, J., & Davies, H. (2015, May 18). Where there is oil and gas there is Schlumberger. Retrieved October 7, 2016, from https://www.theguardian.com/environment/2015/may/18/where-there-is-oil-and-gas-there-is-schlumberger

Duff, V. (2016, September 22). Halliburton Unveils New Leak Detection Technology (HAL, SLB). Retrieved October 21, 2016, from http://www.investopedia.com/news/halliburton-unveils-new-leak-detection-technology-hal-slb/

Kibsgaard Speaks at 2011 Investor Conference. (2011, February 23). Retrieved October 7, 2016, from http://www.slb.com/news/presentations/2011/2011_0223_pkibsgaard_investor_conf.aspx

Maxfield, J. (2015, December 2). These 5 Companies Own 21% of Schlumberger Stock. Retrieved September 30, 2016, from http://www.fool.com/investing/general/2015/12/02/these-5-companies-own-21-of-schlumberger-stock.aspx

Nathman, D. (2015, December 8). Schlumberger-Cameron Deal Versus Halliburton-Baker Hughes Merger - Part 1. Retrieved September 24, 2016, from http://www.forbes.com/sites/dougnathman/2015/12/08/schlumberger-cameron-deal-versus-halliburton-baker-hughes-merger-part-1/#5742f17c21ee

Oil and gas regulation in the United States: Overview. (2016, June 1). Retrieved September 30, 2016, from http://us.practicallaw.com/9-525-1545?source=relatedcontent

Quick Guide Schlumberger. (2014, January 1). Retrieved September 30, 2016, from http://www.slb.com/~/media/files/careers/201405_quick_guide_schlumbergersaxon.pdf

Schlumberger. (2016, September 30). Retrieved September 30, 2016, from http://www.slb.com

Schlumberger Oilfield Holdings Ltd. Agrees to Plead Guilty and Pay Over $232.7 Million for Violating US Sanctions by Facilitating Trade with Iran and Sudan. (2015, March 25). Retrieved September 30, 2016, from https://www.justice.gov/opa/pr/schlumberger-oilfield-holdings-ltd-agrees-plead-guilty-and-pay-over-2327-million-violating-us

Team, T. (2015, October 13). Schlumberger To Remain Resilient In 3Q Driven By Its Transformation Program. Retrieved September 24, 2016, from

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http://www.forbes.com/sites/greatspeculations/2015/10/13/schlumberger-to-remain-resilient-in-3q-driven-by-its-transformation-program/#5cd7267646c7

Wethe, D. (2016, July 21). Schlumberger Joins Halliburton in Calling Oil Cycle’s Bottom. Retrieved September 24, 2016, from http://www.bloomberg.com/news/articles/2016-07-21/schlumberger-posts-surprise-2-2-billion-loss-cuts-more-jobs

1920s: The First Well Log. (n.d.). Retrieved October 20, 2016, from http://www.slb.com/about/history/1920s.aspx

Appendix

Organizational Chart