China's Latest Global Push: Oil-Field Services
China aims to become a global powerhouse in auto making, aerospace and other sophisticated industries. Its latest push: the lucrative business of providing equipment and know-how in the oil patch.
Long confined to the domestic market by subpar technology and a lack of experience, China's oil-field-service companies are gaining toeholds from Russia to Texas. Executives with two of the largest say they plan to triple the portion of their revenue earned outside China within the next few years. The oil-field-service units of several major Chinese oil producers put in a big appearance at last week's Offshore Technology Conference in Houston, arguing that China's vast labor pool and industrial capacity could fit the needs of an industry that is straining to find enough personnel and material to keep the world's oil fields pumping.
But the barriers to providing the most-sophisticated and most-profitable products and services are daunting. Already, some in the industry say efforts by Chinese companies can't yet meet more advanced requirements. The gap underscores China's limitations as well as its possibilities as it leverages its industrial capacity and vast labor pool to compete with long-established Western companies in a host of industries.
The oil-field-service industry provides everything from drilling rigs and metal tubes to software and engineering skills that are crucial to tapping new supplies. The industry has boomed since the price of oil began its three-year surge. The number of oil and natural-gas drilling rigs operating world-wide has increased steadily since 2003, hitting a 21-year high of 3,352 rigs in February, according to Baker Hughes Inc., an oil-field-service company that conducts a monthly census. Activity is expected to grow: Lehman Brothers estimates world-wide exploration and production spending will rise 8.9% this year to $291.5 billion -- figures that don't include big spending plans by state-owned oil companies in the Middle East and Africa.
China's oil-field-service campaign comes as the country continues to escalate its presence on the international oil scene, establishing ventures to produce oil from Venezuela to Ethiopia to quench its fast-growing thirst for energy. Having a sure supply of oil-field equipment and workers is especially helpful in countries such as Iran, Sudan and Myanmar, where Western companies face pressure and sometimes legal restrictions against providing services.
Because oil-field work is often done in hazardous places, Chinese oil-field workers have recently become targets for kidnapping and violence. Incidents in places like Ethiopia and Nigeria have been heavily covered in China's state-controlled media. While there appears to be no public backlash to China's involvement in high-risk locations, publicity could make it difficult in the future.
A handful of Chinese companies are already well-known in the services world. BGP Inc., a unit of oil producer China National Petroleum Corp., provides seismic technology, which is used to explore reserves. Other sectors, such as rig building, have existed since the 1930s but have taken off in the past few years.
Baoji Oilfield Machinery Co., also a unit of China National Petroleum, is the oldest and largest rig manufacturer in China by production, building more than 50 rigs a year. The 68-year-old company has long exported rigs abroad, but it cracked the U.S. market only in 2006. HongHua Co. is China's second-largest rig producer and is able to build 50 rigs a year. The company built its first rig in 1998 and began deliveries to the U.S. in 2005. Both companies say they expect future growth to come from outside China.
Chinese companies have been most active in Africa, the Middle East and Asia. In 2005, the first Chinese rig arrived in the U.S., sparking an uproar from local politicians who compared Chinese crews drilling on American soil to outsourcing. A worsening equipment shortage trumped political opposition, however, and orders for Chinese-built rigs have been delivered to U.S. companies.
"Their expansion is most welcome," said Bernard Duroc-Danner, chief executive of Weatherford International Ltd., the fourth-largest services company by market capitalization. "There's a shortage of people, equipment, just about everything."
Jiang Xizhao, president of Offshore Oil Engineering Co., a unit of Chinese oil producer Cnooc Ltd., said the company hopes to increase international business from 10% of revenue in 2006 to between 30% and 40% by 2012. Last year it posted profit of 747 million yuan ($96.9 million), up 28%. It posted 2006 revenue of 4.97 billion yuan, up 17%.
China Oilfield Services Ltd., another Cnooc unit, in 2006 nearly doubled the percentage of its 6.36 billion yuan in revenue from overseas, to 17% from 9%. The company said it wants 30% of revenue to come from outside China in 2008. Overall, it posted a 2006 profit of 1.39 billion yuan, up 64% from 2005, and revenue grew 33% from 2005.
But for all the enthusiasm, the Chinese oil-field-service campaign faces some challenges. Its industry is still known more for its cheap and quick construction than its technological prowess.
"We have had to spend a fair amount of our own time, money and effort adapting the rigs we received...particularly for the ones from China to make them workable to our standards," said Gene Isenberg, chief executive of Bermuda-based rig operator Nabors Industries Ltd., which began receiving Chinese-built rigs last year. He said Nabors will rely less on Chinese vendors in the future.
China's labor force has a growing base of engineers, but relatively few specializing in niche fields needed to make Chinese companies truly competitive internationally, Mr. Jiang said. "The market is not fully developed in China to meet basic requirements," he said at the Houston conference.
Mr. Jiang noted that Chinese-built rigs are rated to work in waters as deep as 990 feet, compared with 396 feet in the late 1990s. But new reserves are increasingly being found in waters 6,600 feet deep or deeper. China Oilfield Services is in the early stages of building a deep-water drill-ship capable of operating in water 9,900 feet deep. Delivery is scheduled for 2010.
The looming concern for the industry, Mr. Jiang said in his speech last week at the Houston conference, is that labor costs will rise to international levels before Chinese companies can close the technology gap.