Oiling the wheels

John D. Rockefeller became the most powerful oilman America has ever seen – and, relatively speaking, the richest man in its history – without finding a single barrel. His Standard Oil achieved supremacy in the US by owning refineries and controlling pipelines and rail routes. On his death in 1937, Rockefeller’s $1.4bn fortune was about 1/65 of US GDP, equivalent to about $230bn today.

Standard Oil’s successors, ExxonMobil and Chevron, are two of the world’s four largest private sector oil groups, and make up a large part of another, BP. But the hundreds of thousands of small oil explorers who created the US industry in Pennsylvania have left little trace, living on only in the history books.

Rockefeller’s career is a reminder that the least glamorous side of the energy business can often be the most profitable. Stories about oil tend to focus on the thrill of the quest, but the record shows that providing products and services that the explorers need is generally a better route to long-term success. At a time of rising global energy demand, as over the past 12 months, it is no surprise to see oil and gas service companies such as Schlumberger and Baker Hughes moving up the FT500 rankings.

When the price of oil goes up, as it did in 2010-2011, demand for rigs, drills, lubricating fluids, pumps and measurement tools rises too. That demand has grown faster than suppliers can keep pace with, so prices for those products and services have risen, too. Companies that have been lucky or far-sighted enough to possess capabilities in those market niches have prospered, just as the largest beneficiaries of the California gold rush were suppliers of pickaxes and overalls.

The prosaic image of the oil services business does not mean it is boringly stable. Capital spending can quickly be dialled up and down, and as the oil price plunged in the second half of 2008, the exploration and production companies, from the largest “supermajors” to the smallest independents, cut their spending plans sharply, by an estimated 22 per cent for 2009, according to IHS Herold, the consultancy. Although not as harrowing as the period a decade ago that followed the fall in the oil price to around $10, the past three years have still been a roller-coaster time for many oil services groups.

National Oilwell Varco, a manufacturer of drills and other equipment for oil and gas wells, is the biggest riser on this year’s FT500 list, in part because it is bouncing back after a troubled time. The shares, which were about $70 as this magazine went to press, fell below $20 late in 2008. The company has, however, positioned itself strategically when it comes to the current demands of the energy industry: for instance, with the extraction of shale gas and oil from rocks that were previously not commercially viable, but have been opened up by modern techniques.

The process of hydraulic fracturing or “fracking” – injecting water mixed with sand and chemicals underground at high pressure to crack the rock and allow the gas and oil to flow out – was described by Pete Miller, NOV’s chief executive, as “shock and awe” for the energy business. In that campaign, he provides some of the crucial hardware.

Another revealing aspect of the oil services sector in the FT500 is the performance of the companies linked to BP’s Macondo well disaster in the Gulf of Mexico last year. Transocean, the world’s largest offshore drilling contractor, which owned and operated the Deepwater Horizon rig that exploded on April 20, saw one of the steepest declines of the year, falling 90 places to 363 from 273 last year. Transocean is locked in a legal dispute with BP over responsibility for the accident that killed 11 men and created the largest ever accidental offshore oil spill, and may also face action from the US authorities.

However, Halliburton, which provides a range of services to oil companies and worked on the Macondo well, was one of the year’s steepest risers, up 103 places from last year’s 279 to 176. Although it has been criticised for its alleged contribution to the disaster, it was involved in only one part of the project, as BP’s cementing contractor.

The other important trend in the sector has been the comeback of the emerging market companies. In 2007 PetroChina, the listed arm of the China National Petroleum Corporation, became notionally the world’s largest company by market capitalisation, helped by a thin float of shares available to investors. It has lost that title to ExxonMobil, but the return of some confidence to financial markets, and the clear signs of outperformance by emerging economies, meant that energy companies from outside the developed world were some of the biggest risers on the list.

The champion of those was Novatek, the independent Russian gas company, which rose 194 places, recovering from its time in the sick patch in 2008-2009. For a while it looked as though it would be squeezed out by Gazprom, the state-controlled Russian gas export monopoly, which had a 19 per cent stake, now 10 per cent. But Novatek has thrived, recently signing a strategic partnership with Total of France, which will take a 12 per cent stake.

Ed Crooks is the FT’s US industry and energy editor

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