Schlumberger CEO lays out his plan to weather the crude crash

HOUSTON — The CEO of Schlumberger says his firm is willing to take on riskier contracts that base its pay on how much oil it help producers extract, at a time when competition for oil field work has become red in tooth and claw.

It’s a gamble that he says could change the psychology of the oil industry, as the effort will require oil field operators and their service providers to work much more closely on everything from initial project designs to implementing plans.

“This isn’t something we can do by ourselves,” Schlumberger CEO Paal Kibsgaard said Friday in a quarterly earnings call with investors. “Given the capabilities we have, I think we’re underutilized today and we have a lot more to contribute, even in the design elements. We can engineer costs out of the system before we go to implementation.”

Under such contracts, Schlumberger would absorb the initial labor and technology costs and get paid back based on oil production. Its an arrangement that trades fixed service prices for upside linked to the output of a project. The model, Kibsgaard says, could work well for re-fracturing jobs — second rounds of hydraulic fracturing on an old well that has been fractured before. Hydraulic fracturing is the process of blasting water, chemicals and sand into a well to release oil and gas from shale rock.

The growing re-fracturing business is one that could boost Schlumberger’s bottom line at a time when tumbling oil prices have sent its first-quarter profits down 39 percent and producers are asking for deep price concessions.

“You’re talking billions in revenue opportunities over an extended period of time,” Kibsgaard said, adding that thousands of North American shale oil and gas wells could be ripe for a second wave of fracturing. “But I think the key is we are so confident in our ability to identify the right candidates and execute the work that we are prepared to take significant risk in terms of how we go about doing this work.”

The price concessions that Schlumberger and its rivals have had to make to help oil companies cope with low energy prices have hit the hydraulic fracturing business the hardest. But some of that pressure has been mitigated because oil companies are experimenting with new technologies like Schlumberger’s re-fracturing service, which, for example, doubled production from two wells in South Texas.

Still, Kibsgaard said, re-fracturing isn’t going to be big enough to fix the oil service industry’s biggest problem – a glut in equipment – even when oil prices rise again. He said he doesn’t expect the North American rig count to return to previous high levels seen during the shale oil boom, though it will land somewhere in between that and the lows of today.

“We are unfortunately going to have to live with (the pricing concessions) for a while, because there’s going to be a significant overcapacity for all sorts of services that are going to recover,” he said.

For Schlumberger, the downturn has been painful. The firm, which is based in Houston, Paris and the Hague, said Thursday it has more than doubled the number of workers it plans to lay off to 20,000. Its first-quarter earnings came in lower than analysts expected.

But Kibsgaard said new closer collaboration in the oil industry can help steer it out of the fog. He said the firm is discussing the riskier contracts with a number of customers.

“This is pretty much a change in psychology,” he said. “Some of our customers might take us up on it, and some might not. This is something we can take on and put more skin into.”