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Acergy and Subsea 7: Deal Signals a New Reality in the Oil and Gas Market

06 July 2010

The planned merger between Acergy and Subsea 7, like the similar deal agreed by Schlumberger and Smith International earlier this year, illustrates the new environment in the oil and gas services market. With firms looking to become stronger so that they can overcome costs and complexity challenges, consolidation is likely to emerge as a popular strategy.

With limited opportunities in shallow waters and conventional onshore areas, international and national oil and gas companies are increasingly paying attention to deepwaters and unconventional sources with higher exploration and production costs and greater technical challenges. Such moves towards areas with significant technical and economic complexity are expected to push services providers and equipment manufacturers in this market to change their current business models and market approach.

The recently announced merger between Acergy and Subsea 7 clearly signals the need for service providers in the oil and gas industry to leverage and combine strengths and resources. As deepwater projects are becoming larger and more complex and tend to involve difficult risk assessments, bigger companies, with better financial and operational resources, are likely to enjoy improved competitive clout.

In addition, the impact of the BP's Gulf of Mexico spill on global drilling activity is expected to hasten the need for robust and diversified service providers, as the aftermath of the Macondo accident could create a regulatory clampdown on deepwater drilling worldwide. Therefore, companies in this market should adopt pre-emptive strategies and try to leverage synergies whenever possible.

Acergy and Subsea 7 will have the chance to offer strong subsea engineering and project management capabilities. The combination of both companies' assets is also likely to enhance their total fleet in terms of size and specifications. From a geographical perspective, Acergy and Subsea 7 will gain important synergies, with Acergy's strength in West Africa and Asia complementing Subsea 7's in the North Sea and Brazil.

The same rationale applies to the deal between Schlumberger and Smith International. The two companies will have the chance to optimize drilling activities worldwide, controlling costs and increasing efficiency. Furthermore, they will have the opportunity to offer a wider product and service portfolio, from drill bits to drilling fluids, as well as for other parts of the drilling process.

In summary, with deepwater and unconventional sources playing a more significant role in the future of the oil and gas industry, oil companies and service providers will be forced to adopt pre-emptive strategies and industry consolidation may prove to be a feasible way to overcome market barriers and challenges.