A story in the British press reads that oilfield services provider Halliburton has made an offer to swallow rival Baker Hughes for $35 billion; Schlumberger has weighed in on equipment maker Cameron International in a $14.8 billion deal. Companies that specialise in one part of the services market, for example offshore drilling, are in a difficult situation and are finding themselves squeezed by their customers to such an extent that, in order to survive, they are having to accept takeover deals from bigger rivals or risk going out of business; takeover deals that would not have been countenanced 18 months ago are suddenly now acceptable – even welcome!
In such a cut-throat environment, the service providers find themselves giving heavy discounts for the few deals that they can secure because customers find themselves with the upper hand at the negotiating table.
North Sea oil producer Enquest, which hires services firms for projects on a regular basis, said it had negotiated discounts of up to 50 percent on some contracts. The industry consensus on new rates is around 20 percent below previous years. Enquest chief executive Amjad Bseisu told Reuters, "We give our contractors all notice that we're going to fire them. We sit with them and say, 'do you want to negotiate or do you want to bid things out?'"
Because of their weak bargaining position, the services companies also have to take on a higher share of project risks that oil producers are increasingly unwilling to shoulder themselves.
"We are able to be selective and, in different circumstances to transfer a bit of risk to the service side," said Tony Durrant, chief executive of North Sea oil producer, Premier Oil. Rig providers, for example, now charge lower rates for days when their equipment is not used due to poor weather, something that was countenanced a year ago when the risk always lay with the client.
"When rigs are very short they are quite happy to use their negotiating power. It's a balance," said Durrant.
All of which goes to demonstrate how the power balance shifts depending on cyclical shifts in the market. Negotiators need to be flexible and to recognise when they have the upper hand (less need for flexibility) or the opposite (more need for flexibility). When the power balance is against you, you need to be very careful not to set unfortunate precedents, but when it is with you, you need to give the other side some room to breathe, so that when their good times come back and the balance shifts back again, they do not want to punish you!
A fine line indeed!
John McMillan
