Baker Hughes’ Aker Solutions Alliance Highlights The Importance Of Subsea Technologies

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Baker Hughes (NYSE:BHI), one of the world’s largest oilfield services companies, announced that it will form an alliance with Norway’s Aker Solutions to develop technologies that will reduce costs and increase the production and recovery rates for subsea wells. The deal comes at a time when oil and gas majors are looking at ways to maximize reservoir productivity and cut costs, after years of heavy capital spending. The two companies did not disclose the financial terms of this non-incorporated alliance, which would allow them to work on joint solutions and possibly bid for projects jointly. [1] We believe that the deal makes sense for Baker Hughes, since it would allow it to offer subsea customers more integrated solutions that combine its strength in well completions and artificial-lift technology with Aker Solutions’ expertise in subsea production and processing systems.

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Why  Subsea Technologies Are Important

Production monitoring and control equipment for offshore oil wells have traditionally been placed on floating platforms that lie above the ocean’s surface. However, this is often not viable in the case of deepwater and ultra-deepwater wells, where the wellhead lies several thousand feet below the ocean’s surface. Additionally, these systems are also vulnerable to storms and bad weather, potentially disrupting production activity and causing safety issues. Subsea systems, on the other hand, are placed on the ocean floor, sometimes at depths of as much as 10,000 feet. These systems are designed to withstand extremely high pressures (up to 300 times that on the ocean’s surface), low temperatures and strong currents at the ocean floor. Subsea technologies allow oil producers to operate more efficiently with less weather related downtime and possibly lower operating and maintenance costs.

Subsea technologies have been among the fastest growing areas in the offshore space. According to a Bloomberg Businessweek, subsea spending is estimated to have grown from less than $7 billion in 2010 to about $14 billion in 2013. [2] While the market for subsea equipment had traditionally been catered to by small and specialized companies, bigger players have been making their presence felt in this space. For instance, Baker Hughes’ larger rival, Schlumberger (NYSE:SLB), inked a subsea alliance with Cameron (NYSE:CAM) in 2012 to share technologies and provide integrated subsea solutions to customers (see What The Cameron Deal Could Mean For Schlumberger).

Production Enhancements A Key Theme In Offshore Sector

Oil and gas companies have been spending less money on seeking out new discoveries, instead focusing on improving the productivity of their wells, in order to maximize their returns on invested capital. This trend towards improving ROIs is reflected in the capital expenditures of oil companies as well.  According to Barclays’ Global 2014 E&P Spending Outlook report, a majority of oil companies have indicated that their exploration spending was likely to remain at current levels or even decrease slightly this year, while production-related spending is expected to rise. Deepwater subsea fields, in particular, could be ripe for productivity enhancement. According to Baker Hughes, these wells sometimes have recovery rates of below 10% (of the well’s total reserves).  ((Baker Hughes and Aker Solutions Form Subsea Production Alliance, Market Watch, April 2014)) Additionally, many new discoveries have been in deeper and harsher environments, which have made fields more expensive to develop. With this alliance, Baker Hughes and Aker Solutions intend to enable oil and gas companies to unlock greater value from their wells by improving production solutions and well-intervention capabilities while lowering the risks related to subsea developments.

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Notes:
  1. Baker Hughes, Aker Solutions form subsea alliance, Reuters, April 2014 []
  2. Oil Companies Race to the Bottom of the Sea, Bloomberg Businessweek, May 2013 []