This category covers establishments primarily engaged in manufacturing machinery and equipment for use in oil and gas fields or for drilling water wells, including portable drilling rigs. Establishments primarily engaged in manufacturing offshore oil and gas well drilling and production platforms are classified in SIC 3731: Ship Building and Repairing.
333132 (Oil and Gas Field Machinery and Equipment Manufacturing)
The health of the oil and gas field machinery industry is inextricably tied to capital expenditures in the oil and gas extraction industries whose health in turn is dependent on the price of oil. Fortunes of the oil industry are also very cyclical. The later years of the 1990s saw a plethora of oil and gas field industry acquisitions and mergers. Companies were attempting to diversify products, capitalize on new technologies and innovations, improve efficiency, and reduce costs. The value of shipments by oil and gas field machinery and equipment manufacturers totaled $6.3 billion in 2001, up from $5.6 billion in 2000.
In the 1970s the Organization of Petroleum Exporting Countries (OPEC) produced more than half of the world's oil. For a variety of reasons, most of which had little to do with supply and demand, OPEC began aggressively pricing oil and consumers were willing to meet their price. But OPEC could not maintain production quotas amongst its members. Subsequently, the market was soon glutted with oil and prices fell. Demand for OPEC oil fell from 31 million barrels a day in 1979 to 17 million barrels a day in 1985. In 1997 and 1998 OPEC again boosted production as demand growth stagnated due to global economic problems.
The oil industry suffered further volatility during the early 2000s, caused by global oversupply and the U.S. war against Iraq in 2003 that led oil prices to spike as high as $40 a barrel. Usually, high oil prices provoke increased exploration and drilling, which, in turn, fuels the oil and gas field machinery industry. However, because economic uncertainty remained high and consumer confidence low, during 2003 higher prices did not instantly spur new oil and gas field development. A gradual uptrend in the economy is expected, and as consumer, commercial, and industrial sectors pick up steam, an increase in energy demand is anticipated. Once consumer confidence returns, oil and gas companies will be more apt to sink money into oil and gas field services and equipment.
The oil and gas field machinery industry includes field tools, oil derricks, drilling rigs and tools, well logging and surveying equipment, and general gas well and oil field machinery and equipment. Many companies exist in the United States that make specialty drilling equipment and other related machinery. Other companies, such as machine tool makers, produce smaller parts either for assembly at the more specialized companies or to meet replacement needs while the rig is in service. The companies producing drilling rigs usually maintain a field service department. Private consulting firms, however, may also specialize in field repair of all oil field related equipment. Oil and gas field machinery companies thus provide equipment and services to the oil industry that are used in drilling, testing, and finishing oil and gas wells, as well as enhancing existing wells. Equipment may be premanufactured or it may be built and assembled in the field. These companies may also provide on-site service once a well begins operating. Customers of the industry are oil and gas producers and drilling companies. In the United States, approximately 97 percent of the drilling rigs are owned by drilling contractors, not the oil and gas producers.
The oil industry finds itself variously controlled, compromised, regulated, influenced, and lobbied for or against by organizations like the Organization of Petroleum Exporting Countries (OPEC), the American Petroleum Institute, the ever volatile geopolitics of the Middle East, and the vagaries of the American consumer. Domestically, the industry is also controlled, to a great extent, by regulations imposed by the U.S. government and the governments of international competitors. The Environmental Protection Agency has begun to place stringent restrictions on companies selling crude oil, which ultimately affects the cost of producing oil. This can drive profits downward, especially if coupled with low oil prices. Given these conditions, oil drilling is being performed more and more by major oil-selling companies like Exxon, Texaco, and Citgo. This is in sharp contrast to the early 1980s, when drilling rigs were common sights in the front yards of southern and midwestern private homes.
Any decrease in drilling activity world-wide adversely effects the oil and gas field machinery industry. Smaller support machinery businesses that thrived in the early 1980s amidst high oil prices either went out of business or were bought out. This trend continued throughout the 1990s and by the end of the decade the industry consisted mostly of very large, well-diversified companies. For example, IRI National of Houston and Norways's HitecASA merged to form IRI Hitec, which focused on the design, engineering, and manufacturing of technically advanced offshore and land-based drilling equipment. In 1997 the Halliburton Company acquired the Numar Corporation and in 1998 acquired Dresser, making Halliburton the largest provider of oil field services. Halliburton purchased Dresser so as to bring together oil field, engineering, and construction services. Numar was purchased because of its patented Magnetic Resonance Imaging Logging tool that evaluates subsurface rock formations in new wells. Another important industry event was the 1998 acquisition of Western Atlas by Baker Hughes. By the late 1990s the three dominant companies in the industry according to Standard & Poor's were Halliburton, with 1998 revenues of $17.4 billion, Schlumberger Ltd. with revenues of $11.9 billion, and Baker Hughes at $1.7 billion.
In the United States, oil drilling evolved as a result of seeking salt brine. Without refrigeration, one of the few means of preserving meat was through packing it with salt. Therefore, salt brine was a commodity in heavy demand. In 1806 two brothers, David and Joseph Ruffner, established a business supplying settlers near Charleston, West Virginia, with salt brine. Quickly, the demand for the salt became so great that the brothers devised a way to drill a hole to intercept the flow of the brine seepage. This well, responsible for developing the spring pole and drilling line, was the first well drilled in America with tools. From this point, other types of wells were drilled in the Ruffner fashion. In 1814, near Burkesville, Kentucky, the "American Well" was drilled, which was 475 feet deep and supposedly produced 1,000 barrels of oil per day.
The invention of the steam engine in tandem with cable tools changed the nature of oil and gas drilling from 1860 to 1930. During this time, crude oil was gaining favor as an illuminant, replacing whale oil used for lamps. Also, the use of machinery to aid man's endeavors was more widespread, and crude oil was known to be an excellent lubricant. Its use as a fuel was also gaining popularity. These three developments created a demand for oil drilling; thus the industry gained momentum. The first well drilled in America strictly for oil production to supply the machinery industry was the Drake well. Following the Drake well, patent applications were filed in abundance for a wide assortment of tools, rigs, and machines to support oil drilling activities. Among these patents were predecessors to common modern oil industry machinery, including rolling cutter rock bits, an offshore drilling rig, and rotary and percussion motion devices.
From this point, the oil boom was upon the world. An oil field in Corsicana, Texas, was the first well to catapult the blooming industry into the powerful economic prominence it holds today. In this oil field, the Lucas Spindletop well "blew" on January 10, 1901. Once it was contained, it produced approximately 75,000 to 80,000 barrels per day. Exploratory drilling in the Gulf Coastal Plain areas of Texas and Louisiana became commonplace and produced abundant supplies of oil. Likewise, oil fields in California and the mid-western plain states were cropping up.
It was not until the 1930s that oil drilling really became a science. Although the American Petroleum Institute organized its first equipment standardization committee in 1925, the industry did not really become specialized for another five to ten years. Before the 1930s, the parts of an oil drilling rig were made for other machines. While these makeshift rigs were practical and effective enough to achieve the purpose intended, vast improvements were necessary to efficiently produce oil with less waste. Mechanical engineers and petroleum engineers started designing oil field machinery and tools. From these efforts the following were created: better tooth and ball bearing designs of rock bits, roller bearing enclosed engines, automatic controls for steam generating plants, and gas engine electric generator sets with motors. Also, drilling rig personnel were becoming more educated about professional and safety practices.
Basically, the same principles are employed today as in the past. Aside from the demise of oil derricks, which have given way to pumping units, and the off-shore drilling methods used along the coast lines, the industry has not radically changed since its inception. The oil drilling industry can be summarized as an evolution of improved techniques, which will continue as long as oil lies beneath the earth's surface.
Standard & Poor's June 1999 Industry Survey was anticipating a rebound in oil prices as 2000 approached. Foremost among factors influencing their optimism was OPEC's determination to cut production. As stated previously, the price of a barrel of West Texas Intermediate crude oil jumped from $12.00 a barrel in early 1999 to $18.50 a barrel by May of that year. In spite of this rise in the price of a barrel of oil, oilfield activity remained low in 1999. For instance, the Baker Hughes rig count (the number of oil drilling rigs exploring for oil and gas) was at 507 in June 1999, down 42 percent from May of 1998 but a bit higher than the April 1999 count of 488 rigs. This in fact is the lowest number since Baker Hughes began counting rigs in 1944. However, U.S. Industry & Trade Outlook '99 quotes an Offshore Data Services report showing a worldwide offshore rig fleet utilization rate of 95.6 percent, which reflects a steady rise since a 1986 low. High rig utilization rates are usually a precursor to rising day rates, which is the price paid to a drilling contractor for a day's work which in turn reflects higher profits. Also quoted is a forecast from the Energy Information Administration predicting an increase in the energy market share of petroleum from 38 percent (1996) to 40 percent in 2020, which would increase exploratory drilling and perhaps contribute to rig shortages, especially in the Gulf of Mexico and the North Sea.
On the other hand, the 1998 domestic rig count by the Reed Tool Co. showed U.S. rig utilization at 77 percent in mid-1998, down from 87 percent a year earlier. The report also showed that while day rates for offshore rigs increased 62 percent in 1997 and 17 percent in 1998, the rate for land rigs fell 5 percent in 1998 after a 1997 increase of 19 percent. Between mid-1998 and early 1999, however, it was likely that onshore and offshore utilization rates slipped and day rates declined significantly due to a decline in drilling activity. Making predictions even murkier was uncertainty over the amount of oil Iraq would be allowed to sell because of United Nations (UN) sanctions resulting from the Persian Gulf War, oil discoveries in Algeria and Nigeria, and Venezuelan plans to increase production.
World oil production was expected to decline 1.7 percent in 1999 but show a small 0.5 percent increase in 2000. Much depends on OPEC's production discipline and the subsequent price of oil. If OPEC's policies hold fast, oil prices will rise. As they rise, however, non-OPEC countries, and perhaps some OPEC countries, will be encouraged to raise production. Natural gas production is expected to rise slightly worldwide but decline in the U.S. although natural gas exploration is rising faster than oil exploration. Standard & Poor's predicted world oil demand would increase by 1.0 percent in 1999 or about 700,000 barrels a day. Nearly 50 percent of this growth, however, is expected to be in the United States. U.S. consumption would thus have grown about 2.2 percent in 1999. Demand growth in various Asian nations would show 1.6 percent for the same period.
Because of forecasts showing firm prices and solid demand growth, oil and gas companies spent more money on exploration and production. Capital expenditures, however, declined 5 percent in 1998. Capital expenditures by oil and gas companies represent, of course, the total revenue of the oil and gas field machinery industry. Although capital expenditures for exploration and production in the oil and gas industry rose 26 percent in 1997 compared to 1996, Standard & Poor's estimated these same expenditures to fall 25 percent in 1999. A capital expenditure survey by the Oil & Gas Journal showed that U.S. companies were expected to spend $32.6 billion on U.S. projects in 1999, down over 20 percent from the 1998 figure of $41.0 billion. For the period 1988-1998 industry capital spending outlays have averaged about $34.5 billion a year.
In 2001 the value of shipments for the industry was estimated to be over $6.3 billion. Just as the oil and gas industry was recovering from the topsy-turvy events of late 1990s that saw prices swing widely, the industry was once again challenged by the political and economic conditions of the early 2000s. The terrorist attacks of September 11, 2001 pushed a slow downturn in the economy, beginning in early 2001, into a freefall, and the commercial and industrial sectors stalled out. Hoped-for recovery in 2002 did not materialize, and in December 2002 workers at Venezuela's national oil production facility went on strike, causing an upset in the U.S. import supplies of crude. On the heels of the strike came the U.S. war against Iraq, which briefly drove prices as high as $40 per barrel, before returning to the mid-$20 range. Global oversupply also threatened the industry's delicate equilibrium in the early 2000s.
As a result of the turmoil within the oil and gas industry, oil field equipment manufacturing struggled, leading to a flurry of mergers and acquisitions. Despite the short-range difficulties, long-range predictions are positive for the industry, with slow but steady growth predicted into the 2010s. The world's peak oil-producing years are projected to be coming in the years 2020-2030, or earlier. Because the use of natural gas is on the rise in the United States, especially as a means to generate electricity, natural gas drilling services and supplies should also continue to be a viable market in the near to mid-range future.
Three dominant players in the industry are Halliburton Co., Schlumberger Ltd., and Baker Hughes Inc. The Halliburton Company, of Dallas, Texas had sales of $12.5 billion in 2002 and a net loss of $998 million. Halliburton has an assortment of divisions that provide a wide range of oil field services. Bariod Drilling Fluids, as its name implies, develops and sells oil drilling fluids for various applications. NUMAR, with its Magnetic Resonance Imaging Logging, measures the potential of new wells to produce oil or gas in commercial quantities. Security DBS supplies roller cone rock bits, fixed cutter bits, coring equipment and services, and downhole tools.
Halliburton's purchase of Dresser Industries made Halliburton the world's largest supplier of oil field services. Prior to its acquisition by Halliburton, Dresser had sales totaling just under $7.5 billion in 1997 and a net income of $318.0 million. In 1997 Dresser had 31,300 employees. Baker Hughes had 21,500 employees the same year. Dresser Wheatley provides safety valves, flow control equipment, well screens, surface safety systems, as well as plunger pumps, liquid meters, and gas measurement equipment. Sperry-Sun provides drilling engineering services, tools, sensors, software for integrated systems, and rig site information services. 1999 revenues for Halliburton were expected to be in the neighborhood of $20.0 billion.
Schlumberger Ltd. of New York likewise provides a variety of oilfield services and electronic measurement products. The company had sales of $13.5 billion in 2002 and a net loss of over $2.3 billion. The company has seven divisions that provide a wide variety of oil field services: Anadrill, Dowell, Geco-Prakla, Geo Quest, Integrated Project Management, Sedco Forex, and Wireline & Testing. By late 1999 Schlumberger was expected to spin off its offshore drilling unit, Sedco Forex Offshore, and merge it with Transocean Offshore. This merger would result in the creation of the world's largest offshore drilling company. The merger comes as a result of the high cost and high technological demands of offshore drilling.
Baker Hughes was formed in 1987 when, amidst a global oil slump, Baker Oil Tools and the Hughes Tool Company merged. In 1998 Baker Hughes merged with Western Atlas to form the third largest oil field services firm which retained the name Baker Hughes. The bid was reported to be between $5.1 and $5.5 billion. The company makes oil field equipment and provides oil field services for drilling, completing, and operating oil and gas wells. Baker Hughes has nine divisions providing a wide variety of oil field services: Baker Atlas, Baker Oil Tools, Baker Petrolite, Baker Process, Centrilift, E & P Solutions, Hughes Christensen, and INTEQ. Baker Hughes has 26,500 employees worldwide and had 2002 revenues of $5 billion.
Between 1982 and 1994, over half of the establishments in this industry either went out of business or were consumed by larger companies. This trend continued throughout the remaining years of the decade. In 2001 total employment in the industry was 27,666, with about 17,122 being classified as production workers. Although the total number of establishments decreased, employment was on the upswing. Payroll in 2001 was $1.28 billion, with wages of nearly $625 million. In 2001 the average hourly wage was $18.03.
The industry is primarily composed of blue collar workers, such as welders, assemblers, machinists, and machine builders. The strongest employment opportunities in the industry in subsequent years will most likely be found in the fields of service and technical support rather than in the production of new units. While employment of machine assemblers in the general construction and related machinery industry is expected to increase by almost two-thirds by 2005, significant cuts are expected in almost all other areas, especially machine builders and operators and clerical staff.
Industry analysts are guardedly optimistic when discussing the outlook for the oil industry over the next three to five years. Robert Beck, managing editor—economics and special projects for the Oil & Gas Journal , believes that a three-year global economic expansion will boost an overall demand for energy, especially for oil and gas. He foresees slow but steady growth in the industrialized nations and continued improvement in the developing nations and Eastern Europe. The countries of the former Soviet Union (FSU) are, however, a bit of a wild card. "The economic situation in the FSU is chaotic and its outlook uncertain," Beck writes. It is hoped that the global economic downturn of 1997 and 1998, which was due in great part to the Asian economic crisis, has run its course. The International Monetary Fund is projecting an average annual growth rate of 4.9 percent for developing countries in 2000. Economic growth in the developing nations of Asia is expected to be 5.7 percent, with the countries of Latin America registering 3.5 percent. Oil & Gas Journal also predicts a 0.6 percent growth in energy consumption for every 1 percent gain in economic activity. Total energy consumption of member countries of the Organization for Economic Cooperation and Development (OECD) is expected to rise 3.9 percent between 1999 and 2000. Total worldwide energy demand by 2002 is expected to increase 6.7 percent over 1999. The demand for natural gas is expected to increase 4.6 percent by 2002 and petroleum consumption is expected to increase 6.1 percent by the same year.
There is also guarded optimism concerning the ability of OPEC to maintain discipline amongst its members. OPEC did succeed in 1999 in limiting production, which subsequently boosted oil prices. OPEC must be careful, however, not to raise prices too high, which would most likely result in a drop in demand and capital investment in other forms of energy. Iraq, however, is not part of the quota agreement and its vast reserves, coupled with rising prices, may cause that country to boost output rapidly should UN sanctions be lifted.
By mid-1999 there was cautious optimism in the industry about research and development and new oil field services technology. This optimism was based on an apparent rebound of oil prices and the belief that new technologies are needed to meet growing demands on the industry, both gas and oil. "Technologies are critical to drilling economics, and advances in drilling technology are allowing drillers to work much smarter," says John Cochener, principal analyst of resource evaluation for the Gas Research Institute.
A study by the Gas Research Institute that was cited in an Oil & Gas Journal article on oilfield technology predicts that ultra deepwater drilling will grow from 3 percent of total offshore activity in 2000 to 24 percent by 2015. Drilling trends in the industry favor looking at deeper and deeper wells, especially in offshore drilling. This trend is based on new technologies and favorable regulatory rulings. In 1984 Shell Oil drilled a well in 6,952 feet of water. This record was broken in 1987 when Shell Oil drilled a well in 7,520 feet of water. Ships are presently being constructed with capabilities of drilling in 10,000 feet of water. A joint-industry project (JIP) that began in 1996 has spent over $14.0 million on the development of a dual-gradient mud lift drill system that is expected to push operational limits beyond 10,000 feet of water. "Our goal … is to deliver a 12.5 inch well bore to virtually any geologic depth in water depths of 10,000 feet and beyond in the Gulf of Mexico," according to Ken Smith, JIP project manager.
The oil and gas field machinery industry is also looking at exotic materials to enhance efficiency. A JIP between RTI Energy and Grant Prideco has produced and put into use a titanium drill pipe. The pipe is designed with high stress, short radius drilling applications in mind and is being used in Greeley County, Kansas. The titanium drill pipe, which is fitted with fatigue resistant steel tool joints, is resistant to chemicals and weighs half as much as steel with twice the flexibility.
"In the oilfield services sector, the companies that succeed will be those that develop new technologies for increasing the efficiency and reducing the cost of producing oil and gas," stated a 1999 Standard & Poor's survey. The high cost of research and development is, however, expected to exacerbate the industry trend of continued mergers and acquisitions.
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