Halliburton Co, said on Monday it will buy Baker Hughes Inc, in a
$35 billion deal that would create an oilfield services company to
take on global oil services leader Schlumberger NV.
Some experts have raised concerns that the deal, which would merge
the world's second- and third-largest service companies, will reduce
competition and potentially raise the price of materials vital for
drilling.
The United States is home to half of Baker Hughes' and Halliburton's
existing operations, according to company filings. Together they
would dominate some key and costly parts of the oil production
supply chain, overtaking Schlumberger in areas including well
cementing and hydraulic fracturing.
But a 30 percent dip in oil prices since June, fueled by record high
supply, may prevent the new company from raising prices in U.S.
shale formations, giving breathing room for oil companies
considering cost-cutting next year.
"Market pricing will be set by the supply and demand of frack pumps
in the U.S., and there's going to be excess next year and possibly
into 2016," said Michael Lamotte, an analyst at Guggeheim
Securities. "I don't think that their coming together is going to
create issues of pricing power."
The deal is far from closed and it is anyone's guess where oil
prices will be when the two companies actually begin to operate as
one. But the day the deal was announced, executives were eager to
quell concerns about competition.
The deal "is an offering for our customers that can help drive their
cost (per barrel) down," Halliburton Chief Executive David Lesar
said on a conference call to discuss the merger this week. "If we
can demonstrate a way to lower their costs, then they're going to
love this deal, and I think we can do that."
The joint Halliburton-Baker Hughes will now hold 51 percent of the
global market for well cementing, which occurs once a well has been
drilled, and 39 percent of the fracking market, which is essential
for oil drilling in shale plays, according to data from Spears and
Associates and Cowen and Co.
This consolidates two of the costliest parts of the oil production
process, experts said. Drilling and fracking take up most of the
costs, but casing and cementing a well after drilling are also major
expenses.
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The cost of drilling oil wells rocketed in the middle of last decade
as companies sought to crack difficult prospects with new
technologies such as fracking and horizontal drilling.
And while some wells still cost up to $10 million to drill in areas
such as North Dakota, many fracking costs have plateaued or fallen
since 2010 as companies find more streamlined ways to tap shale rock
formations. Wells in the Eagle Ford can be drilled for $4.5 million
to $9 million.
A combined Halliburton and Baker Hughes would also face pricing
pressures because of competition from smaller rivals with strong
regional footholds such as CalFrac Services, Weatherford, and Fortis
Energy Services, said Richard Spears, vice president of consultancy
Spears and Associates.
"Even though for the nation as a whole, Halliburton plus Baker would
have a significant market share, the frack industry is like the real
estate industry: It's location, location, location," said Spears.
"That's why you could put the two together and you would not see a
material increase in pricing."
(This story corrects the ninth paragraph to show the joint
Halliburton-Baker Hughes will now hold 39 percent of the fracking
market, not shale fields)
(Reporting by Jessica Resnick-Ault)
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