INTERNATIONALIZATION OF THE PETROLEUM EQUIPMENT INDUSTRY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87T01127R000100060005-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 38
• Document Creation Date: December 22, 2016
• Document Release Date: October 28, 2010
• Sequence Number: 5
• Publication Date: July 1, 1985
• Content Type: REPORT

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Directorate of secret
Intelligence
ILLEGIB
Internationalization
of the Petroleum
Equipment Industry
PROTECT NUMBER ~-T! ---~-`- lJ-~,
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PACE NUMBERS
TOTAL NUMBER OF COPIES
DISSEM DATE :3
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RECORD C EL`TI'ER ,.3a 0- -Z J 6
JOB NUMBER
Secret
GI 85-10164
July 1985
Copy 2 9 4
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Internationalization
of the Petroleum
Equipment Industry
This paper was prepared by
Office of Soviet Analysis.
Comments and queries are welcome and may be
directed to the Chief, Strategic Resources Division,
OGI
Secret
GI 85-10164
July 1985
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Summary
Information available
as of 10 May 1985
was used in this report.
Internationalization
of the Petroleum
Equipment Industry
relationships with potential buyers.
US dominance of the worldwide petroleum equipment industry has eroded
in the past 10 years largely because of the massive worldwide development
of petroleum resources following the oil price rises of the early 1970s.
Foreign governments and companies were quick to take advantage of this
boom and the broad availability of US equipment and technology to build
domestic petroleum equipment industries. Today, in a weak oil market and
period of major equipment industry retrenchment, virtually all petroleum
equipment can be purchased outside the United States from either foreign
companies or US subsidiaries in a highly competitive marketplace. Many
foreign companies have become effective competitors because of national
policies that protect and nurture domestic industries, attractive financing,
lower manufacturing costs, the strength of the dollar, and special political
improved on it as needed, especially offshore.
US companies and their foreign subsidiaries still retain their nearly com-
plete worldwide market and technology dominance in some specialized but
important sectors of the petroleum equipment industry that either embody
exceptionally advanced technologies or are too small and capital intensive
for foreign competitors to enter. These sectors include specialized geophysi-
cal equipment, advanced computers, high-pressure wellhead equipment,
downhole completion gear, high-capacity electric submersible pumps, and
gas lift valves. Even in most of these equipment sectors, foreign competition
is present, but manufacturing capacity or field experience is limited. Among
the industry sectors, where technology is less critical, US manufacturers
continue to be the primary force in onshore drilling and production markets,
although foreign competition is on the rise. The foreign petroleum industry
generally has taken established US petroleum technology and adapted or
The outlook for continued weakness in the world oil market during the rest
of this decade is likely to lead to stronger foreign competition in the
petroleum equipment industry, especially from government-supported
Asian and West European companies able to offer attractive financing. New
market opportunities will focus attention on deeper offshore and marginal
field development, Arctic development, and, to a lesser extent, sales to
Communist countries. Although more than half of all petroleum equipment
expenditures in the non-Communist world over the next five years will
continue to be spent in the United States-primarily onshore-worldwide
offshore activities are playing an increasingly important role in the petro-
leum equipment market. We expect offshore construction activities will be
Secret
GI 85-10164
July 1985
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focused in the established North Sea and the Gulf of Mexico regions over
the rest of the 1980s, with smaller programs in Canada, South America, and
the Far East. Ambitious energy goals in both the USSR and China could
mean a major expansion of Western business opportunities, although these
national markets will remain a small part of the global petroleum equipment
market well into the 1990s.
Increasing competitiveness in the international petroleum equipment in-
dustry and further weakening of US domination is likely to continue into the
1990s. In particular, we believe the vast lower end of the technology range of
the world petroleum equipment, including the US market, increasingly will
be penetrated by foreign engineering and construction firms and manufac-
turers. High-technology and specialized equipment requirements for
particularly demanding conditions will still be dominated by US companies
and their foreign subsidiaries, although competition will continue to increase
from companies in Western Europe and Japan.
The broad international availability of petroleum equipment technology
challenges the effectiveness of unilateral export-and potentially
COCOM-controls on petroleum equipment. The knowledge to design and
produce the vast majority of petroleum equipment is widespread, and
enforcement of unilateral controls permits foreign companies to expand
their market share. Countries seeking equipment covered by US unilateral
export licensing controls can-in most cases-buy comparable equipment
from foreign suppliers in Western Europe, Japan, and increasingly from
suppliers in newly industrialized countries, such as Brazil, Mexico, Singa-
pore, and South Korea, when they can not obtain it indirectly from the
United States.
Even the effectiveness of COCOM controls on selected dual military and
industrial use technologies embodied in some petroleum equipment may
become ineffective as petroleum technology spreads. Advanced non-
COCOM countries, such as Sweden and Finland, already produce some
equipment controlled by COCOM. Increasing sophistication in electronics
manufacturing in the newly industrialized countries-or acquisition of
sophisticated components from developed countries-could give these coun-
tries the capability to produce COCOM-controlled petroleum equipment.
Efforts to expand controls of exports on military-related petroleum technol-
ogy from COCOM to non-COCOM countries could be extremely difficult
because of trade pressures.
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Secret
Despite the likely adverse trade consequences for the United States, the
increased equipment manufacturing capacity worldwide-particularly in
the oil production and transmission sectors-would permit quick expansion
of production to replace damaged equipment if a major supply source is
disrupted in the near future. The heightened competitiveness of the industry
has led to reduced oil exploration and development investment costs, provid-
ing an incentive for more exploration and development, and an opportunity
to reduce reliance on vulnerable oil sources, such as the Persian Gulf. The
now global competition in petroleum equipment markets is also a strong
inducement for innovation in petroleum equipment products and manufac-
turing techniques that is likely to be important in advancing petroleum
production and reserves in the 1990s when most forecasters next anticipate a
tight oil market.
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Secret
Summary
Introduction
The Internationalization Process
Engineering and Project Management Services
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Internationalization
of the Petroleum
Equipment Industry
US companies traditionally have dominated the
worldwide petroleum equipment industry, particularly
in drilling, production, and refining and in state-of-
the-art aspects of other industry sectors. This domi-
nance evolved over several decades, beginning with
the early growth of the domestic US oil industry-
first onshore and later offshore. Even today, the
United States accounts for approximately 80 percent
of all wells drilled in the non-Communist world each
year. Accustomed to dealing with US domestic equip-
ment suppliers and confident in their products, major
US oil companies continued their relationships with
US equipment manufacturers or their foreign subsid-
iaries as they expanded their operations abroad. Until
the 1970s foreign manufacturers were left with only a
marginal share of the world drilling and production
equipment markets and followed the lead of US
technology in other areas such as exploration and
transmission equipment.
to almost $70 billion
With US-controlled manufacturing capac-
ity and technology stretched to its limits, major
opportunities opened up for foreign manufacturers in
both the advanced and newly industrialized countries.
Foreign governments and companies quickly took
advantage of this business boom and the broader
availability of US equipment and technology to nur-
ture their domestic petroleum equipment industries.
One of the most important forces in the international-
ization process was the active role played by the
governments of new oil-producing countries in requir-
ing domestic participation in the oil industry through
joint ventures, local content laws, and employment of
host-country nationals. The primary goal of these
policies was to develop an indigenous petroleum
equipment industry that would:
? Acquire foreign-primarily US-capital and
technology.
? Create local jobs in an expanding industrial sector.
During the last decade, the market dominance of US
companies in many equipment categories has eroded.
The massive development of petroleum resources
worldwide following the price hikes of the 1970s
created economic and political incentives leading to a
rapid internationalization of the petroleum equipment
supply business. Today, virtually all oil equipment can
be purchased abroad in a highly competitive equip-
ment marketplace, a change that may have important
implications for US trade policies and international
competitiveness well into the 1990s.
Growing oil demand and rising oil prices in the 1970s
caused an explosion of worldwide exploration and
development activity-the greatest boom in the petro-
leum equipment business ever. Non-Communist world
investment in all phases of the petroleum industry
outside the United States soared from about $17
billion in 1972 to about $86 billion in 1982. During
? Reduce hard currency expenditures.
? Develop new export markets.
? Enhance national pride and prestige.
Aside from meeting government requirements, US
companies were encouraged to establish foreign oper-
ations in new producing areas to take advantage of
lower manufacturing costs, trade and tax advantages,
and as a means of avoiding US export and trade
restrictions. US equipment and engineering compa-
nies were quick to respond to these incentives in light
of the potential economic gains. US technical and
manufacturing know-how spread to foreign companies
through a combination of licensing agreements, joint
ventures, and foreign manufacturing or assembly
operations. Today, major US equipment suppliers
have more than 200 manufacturing facilities abroad,
primarily in the industrialized world.
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Development of North Sea petroleum resources in the
1970s gave particular impetus to the transfer and
assimilation of the most advanced US petroleum
equipment and manufacturing technology. The scope
of operations in Western Europe combined with the
technical requirements associated with producing oil
in the harsh North Sea environment quickly led to the
development of a competitive European petroleum
equipment industry. Although much of the technology
originated in the United States-particularly from
the experience of offshore development and produc-
tion in the Gulf of Mexico-European companies
thoroughly integrated US technology into their own
manufacturing operations.
The Industrialized Countries
The United Kingdom and Norway-the two major
producing countries in the North Sea-both devel-
oped extensive offshore equipment supply industries
during the 1970s (appendix A). The British consistent-
ly encouraged multinationals to establish manufactur-
ing facilities in the United Kingdom to supply the
North Sea offshore business. Until recently, the Brit-
ish were more concerned with developing their hydro-
carbon resources with the best available technology
and creating employment in Britain than developing
indigenous UK companies and UK technology. As a
result, foreign companies-primarily US-operating
in the United Kingdom make up a large segment of
the British offshore supply industry. Oslo, on the
other hand, has seen less need for rapid oil develop-
ment and has concentrated on developing a competi-
tive indigenous oil supply industry. As a result, Nor-
way has emphasized the development of domestic
capabilities through the commitment of foreign re-
search and development (R&D) funds to Norwegian
companies (table 1).
Other European governments have pushed develop-
ment of indigenous equipment supply industries main-
ly for export. For more than 20 years, France has
strongly supported an indigenous oil equipment indus-
try believing that a competitive French industry
would improve access to foreign oil resources and the
security of its supply. According to an industry trade
publication, the French have provided more incentive
and financial support for the development of offshore
technology than any other government. French ex-
ports of oil and gas equipment and services-totaling
$6.6 billion in 1983-rank second worldwide after the
United States and have been one of France's leading
foreign exchange earners for several years. State
interests played a prominent role in the development
of the petroleum industry in Italy and the promotion
of Italian companies to among the technological
leaders in the world petroleum equipment industry.
Much of Italy's technical expertise arises from large
government R&D budgets that led to such projects as
the Transmed gas pipeline from Algeria and frontier
drilling activities in deep water. Other European
countries including West Germany, the Netherlands,
Switzerland, Austria, Sweden, and Finland also de-
veloped extensive petroleum equipment industries
during the industry boom of the 1970s.
West European multinational oil companies, such as
Royal-Dutch Shell, British Petroleum, AGIP, Total,
and Elf, have been instrumental in assisting the
development of the European petroleum equipment
industry. In particular, Elf and Total worked closely
with French equipment companies to develop oil
discoveries in the North Sea, West Africa, and other
parts of the globe. Development of the Finnish indus-
try, in contrast, was helped by its close trading
relationship with the Soviet Union. Expert Finnish
shipbuilding capabilities, augmented by US drilling
equipment and technology, has increasingly been used
by the Soviets in their work in the Arctic.
Japan's dependence on petroleum imports led Tokyo
to attach great importance to promoting foreign pro-
duction of crude oil by Japanese companies. The
formation of the Japan National Oil Corporation
(JNOC) in 1967 to promote Japan's exploration and
development programs helped stimulate development
of the petroleum equipment business in Japan. The
strongest force behind the growth of the Japanese
equipment industry, however, has been the Japanese
multinational companies, such as Mitsubishi, Mitsui,
and Hitachi Zosen, and Japanese steel companies,
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Table 1
European Government Support to
Offshore Equipment Industries
Assisting early entry of firms into the industry
NEGL
Substantial
Slight (successful private firms)
State backing for long-term major project
research and development
NEGL
National oil company purchasing
Open door to foreign firms
Selective promotion of major firms
NEGL (except for platform
construction yards)
Major
such as Nippon Steel, Nippon Kokan KK, and Kawa-
saki. Recognizing business opportunities in the petro-
leum construction industry during the 1970s, these
companies began to develop the expertise and experi-
ence to compete globally with US suppliers, particu-
larly in the offshore construction business.
In Canada, many equipment supply companies are
affiliates or subsidiaries of US corporations that have
serviced the onshore Western Canadian market for
many years. Canadian companies also began develop-
ing expertise in manufacturing equipment for Arctic
oil production as exploration and development in
northern Canada grew.
The Developing Countries
Government action in many less developed, oil-
producing countries has led to the creation of domes-
tic equipment industries geared primarily to serving
local markets. Mexico, which expropriated its petro-
leum industry from foreign operators a half century
ago, is archetypical of this group. Technology licens-
ing from US companies by equipment manufacturers
in Mexico has been common for many years, and,
increasingly driven by budgetary constraints as well,
Mexico meets most of its domestic equipment needs
except for some high-technology electronic and metal-
lurgical equipment. Most major OPEC countries,
including Saudi Arabia and Indonesia, also require
domestic participation in lower technology oil equip-
ment manufacturing that is creating domestic oil
production and transmission capabilities. More recent
non-OPEC oil producers-such as Brazil and India-
have also promoted development of domestic petro-
leum equipment industries with considerable success,
although they do not yet have the range of equipment
or technologies available elsewhere. For instance,
90 percent of Brazil's oil equipment purchases are
from domestic suppliers, according to Embassy re-
porting.
Several non-oil-producing, newly industrialized coun-
tries led by Singapore and South Korea have achieved
a major role in the petroleum equipment export
industry. Singapore has long been a manufacturing
and supply center for US, European, and Japanese
multinational equipment and service companies. For-
eign subsidiaries and joint ventures located there
provide essentially the full range of equipment needed
for both onshore and offshore operations. About 450
oil equipment companies operate in Singapore, of
which 70 percent are US subsidiaries, according to
the US Embassy there. Indigenous Singapore compa-
nies have developed the capability to design and
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construct large offshore facilities. South Korea has
emerged as a major supplier of steel-related equip-
ment for the petroleum industry. Hyundai Heavy
Industries and Daewoo both have been building state-
of-the-art offshore rigs, recently winning some of the
largest and most technologically demanding rig build-
ing construction contracts ever. For instance, Daewoo
recently signed a $425 million contract with a US
company to construct six deepwater, harsh environ-
ment semisubmersible drilling rigs. Korea has also
gained experience in offshore oil and gas drilling and,
according to one industry report, plans to enter the
US offshore drilling market.
Today, the internationalization of the petroleum
equipment business has reached almost every phase of
the industry. Engineering and construction firms han-
dling the development of petroleum projects receive
qualified bids from all parts of the globe. Often
equipment for each element of a project is from a
different country and large projects have a mix of
American, European, and Asian firms supplying
goods and services. International joint ventures and
consortiums composed of firms from different coun-
tries-each contributing its particular specialities-
are widespread:
? Japanese and Korean firms are constructing off-
shore drilling platforms for development of deep
offshore reserves and Arctic reserves.
? French, Italian, British, and Korean companies are
developing Libya's offshore Bouri field.
? French, German, British, Finnish, and Canadian
firms are selling advanced oil and gas equipment to
the USSR.
? Ongoing Iraqi pipeline projects involve a mix of
French, Italian, Japanese, and US engineering,
construction, and equipment firms.
? Japanese, West German, British, French, and US
companies are participating jointly in China's newly
opened petroleum sector.
We believe US equipment manufacturers possess
state-of-the-art technology for all aspects of petro-
leum exploration, drilling, production, and pipelining.
No other country has the breadth of technological
capability and manufacturing capacity, in our judg-
ment. US manufacturers, in particular, can respond
rapidly and economically to requirements for special
components capable of satisfying any unusual specifi-
cations. Additionally, US oilfield products have estab-
lished strong reputations for reliability and durability,
offering foreign customers greater assurance than
newer foreign equipment manufacturers that the
products will be cost effective.
Our analysis indicates, however, that several foreign
sources now exist for the majority of equipment
manufactured in the United States. Except perhaps
for the most sophisticated computer hardware, prod-
ucts embodying advanced microelectronics, and for
highly specialized production gear involving advanced
metallurgy and high-pressure elastomer seals, we
believe the United States has lost its sole-source
supplier status in petroleum-related equipment. Some
high-technology. equipment, particularly that used in
high-pressure, high-temperature corrosive oil and gas
production, can be procured abroad only from US
subsidiaries. We believe the reason that foreign com-
petition is absent in most of these specialized petro-
leum equipment categories is not a lack of technical
capability but an assessment of market profitability
by potential competitors. Foreign companies often can
not economically undertake the expensive process of
starting up production and competing with the US
companies without significant government support.
Nonetheless, the extent of foreign equipment avail-
ability covers the gamut of applications, including
geophysical exploration, drilling, production, trans-
mission, control, and engineering and management
services (chart
Geophysical Equipment
Some of the most sophisticated petroleum industry
technology is found in geophysical exploration equip-
ment. Most notably, the complex process of geophysi-
cal surveys frequently uses advanced devices for
acoustical, magnetic, and ultrasonic sensing, com-
bined with state-of-the-art computer processing tech-
nology. According to an industry estimate, the oil
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Relative Strength of Major Petroleum Equipment
Manufacturing Countries
? State of the art
Conipctitive
Developing capability
? Inferior
O No demonstrated capability
Geophysical Equipment
Onshore
Offshore
Drilling Equipment
Rigs/derricks (onshore)
Drill bits
Drill pipe
Logging equipment
?
?
"- O
0
? +.
?
0
?
?
? ?
0
0
? ?
0 0
??
?
? ? 0 ?
?
?
?
0 0 0
Production Equipment
High-pressure wellheads and
blowout preventors
?
"r
--
Downhole well equipment
?
?
0
0
0
0
Casing and tubing
?
?
?
?
?
0
?
?
Submersible pumps
?
0
0
0
0
Remote control systems
?
?
?
to
?
Offshore Equipment
Drilling and production platforms
?
?
?
?
?
?
Riser and motion compensation systems
?
?
?
Dynamic positioning system
?
?
?
?
Heavy lift equipment
?
0
?
0
Remotely operated vehicles
?
? ?
t
5
0
?
Transmission Equipment
Large pip layers
?
0
0
0
0
?
0
I urge-diamUCr pipe
?
191
?
?
0
?
?
Gas turbines/compressors
?
Us
II
t
?
?
Pipe inspection equipment
?
?
0
0
0
0
?
Control and data acquisition systems
?
?
?
?
90
?
Engineering and Project
Management Services
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Military Applications of
Petroleum Equipment
Although the vast majority of petroleum equipment
has no direct military application, several groups of
high-technology equipment primarily incorporating
advanced electronics or metallurgy-can be readily
diverted to important military applications. Trade in
these items with Soviet Bloc countries has been
effectively controlled for the most part through
COCOM restrictions adopted in the last few years. At
present, Sweden and Finland are believed to be the
only non-COCOM countries capable of manufactur-
ing some of this military-related equipment, but the
situation could change as advanced petroleum tech-
nology becomes more broadly dispersed.
The greatest potential for diversion of Western petro-
leum technology and equipment exists in the sale of
state-of-the-art computer and other electronic equip-
ment. Powerful computers with array processors for
geophysical processing and superminicomputers used
for field geophysical work and petroleum network
operations control can also be directly employed in
antisubmarine warfare, ballistic missilery, and tacti-
cal military operations. Advanced geophysical de-
vices for magnetic, acoustic, and ultrasonic sensing
have similar military and naval applications. Ad-
vanced satellite navigation equipment and ship mo-
tion compensation and dynamic positioning systems
for offshore petroleum operations could be used by
naval vessels for similar purposes. Remotely Operat-
ed Vehicles (ROV), submersibles designed to work on
subsea petroleum structures, have alternative naval
application in mine neutralization and object search
and retrieval.
The technology embodied in corrosion-resistant pro-
duction equipment and in equipment for high-
pressure, high-temperature operating conditions is
also applicable to conventional and nuclear weapons
development, naval nuclear propulsion systems, and
rocket and jet engines. To apply this technology to
military purposes would require reversing the engi-
neering of the equipment to understand its qualities
and means of manufacture. Acquisition of advanced
metallurgical manufacturing technology and equip-
ment used to make petroleum gear could be diverted
directly to these military applications. For instance,
the metallurgy for making drill bits and tungsten-
carbide inserts and high-performance turbine rotor
blades have the potential to help military/defense
research and development.
industry is spending $2.5 billion a year to gather
seismic records and another $1 billion to process and
interpret them using large-array processors that tack-
le repetitive calculations and do three-dimensional
analysis.
France probably has the most sophisticated capability
in petroleum geophysical exploration among foreign
suppliers based on the technological strength of com-
panies such as Sercel, Compagnie Geophysical Gen-
erale (CGG), and Thomson-CSF. Additionally, Geo-
physical Company (GECO) of Norway and Prakla-
Seismos of West Germany have growing or
competitive capabilities in geophysical surveying,
oceanographic research, and three-dimensional seis-
mic profiling. Although the market for array
processor-equipped superminicomputers and ad-
vanced computer software for geophysical analysis is
25X1
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JO~I ct
dominated by US suppliers,
foreign survey companies typically modify
the acquired US software for use on their computers
and make it part of their proprietary service package.
Almost all foreign equipment will produce adequate
results and is usually less expensive and more readily
available, although US geophysical equipment gener-
ally meets higher technical standards for sensing and
data processing than foreign equipment.
Drilling Equipment
Foreign availability of most drilling equipment has
increased dramatically in the last 10 years. Virtually
all standard drilling equipment-including the major
elements of the drill rig, such as the derrick, draw-
works, drillstring, kellies, drill collar, stabilizers,
and tool joints-is now available from numerous
manufacturers throughout the world. Although US
manufacturers controlled about 95 percent of the
foreign market 10 years ago, foreign manufacturers
now supply about half of foreign drilling equipment,
As a result of their North Sea experience, French,
Italian, and West German companies now have
sophisticated drilling equipment technology and man-
ufacturing capabilities, and Norwegian companies,
supported by the government, are committed to be-
coming leaders in international drilling technology,
drilling equipment, and Norway has targeted logging
technology and equipment for research and
development.
emerged as a leader in the PCD bit field.
Diamond and carbide drill bits used in exploratory
and production drilling worldwide are readily avail-
able from a large number of foreign manufacturers
and US-licensed companies abroad. Although foreign
drill bits probably are inferior in metallurgical quali- 25X1
ty, foreign manufactured 25X1
products of acceptable quality are being purchased
primarily because of price and financing advantages
offered by non-US suppliers. Growing foreign com-
petitors to US firms include Sandvik of Sweden and
Tsukamoto Seike of Japan. Developing countries,
such as India and Pakistan, are also starting to
produce equipment for domestic use. An important
advance in bit technology has been the development of
polycrystalline diamond (PCD) bits that lower drilling
costs in many applications. Although developed in the
United States, Sandvik of Sweden, the world's largest
maker of cemented carbide and specialty tools, has
25X1
25X1
25X1
25X1
25X1
In each of these coun-
tries, national oil companies now rely primarily on
domestic manufacturers for drilling equipment. Out-
side of Western Europe, Canadian companies have
significant onshore drilling experience, and the Japa-
nese have also begun to manufacture drilling equip-
ment using US licenses.
Foreign companies are also making great strides in
the use of electronics to improve drilling efficiency.
Important advancements in wire line logging tools
include development of multiple downhole sensors
that transmit data to the surface and wellside comput-
ers. Measurement-while-drilling (MWD) systems,
which monitor the direction of drilling, have advanced
rapidly as have vertical seismic profiling (VSP), which
allows the operator to see ahead of the drill bit.
Besides US companies, French firms, such as Schlum-
berger and SMF International, produce electronic
Wellhead Equipment
Onshore and offshore wellhead equipment-Christ-
mas trees, blowout preventors (BOPs) and associated
control systems-are now produced by many manu-
facturers throughout the world, although the non-
Communist world market is dominated by firms with
access to US technology. The key technical difference
among manufacturers is their ability to produce
equipment able to withstand extremely high-
pressure-10,000 to 15,000 psi-environments.
US firms and their foreign
subsidiaries control the small, but growing high-
pressure wellhead market, but a number of foreign
countries, led by the Norwegians, French, British, and
Italians, are moving into the high-pressure offshore
wellhead field.
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Completion and Lift Equipment
A few US oilfield equipment companies and their
foreign subsidiaries dominate the international mar-
ket for downhole completion and artificial lift equip-
ment Major com-
pletion equipment components include float shoes and
centralizers for well cementing, specialized well ser-
vice tools, equipment such as packers and flow con-
trol equipment for production control, wire line equip-
ment for removing components from a well, and well
safety valves. Like the well completion equipment
market, a few US companies and their foreign subsid-
iaries control world production of high-capacity, sub-
mersible electric pumps and gas lift recovery system
valves. foreign man-
ufacturers cannot seriously compete unless they are
able to penetrate the US market where most of the
non-Communist world's wells are. The relatively low
number of well completions and artificial lift pro-
grams outside the United States and strong reputation
of US suppliers have provided little opportunity for
development of foreign competition so far. Still, some
foreign companies including Flopetrol-Johnson of
France, Site Oil of Canada, and Industrialexport of
Romania sell limited completion and lift product
lines, but they do not compete in the high-pressure,
high-temperature, corrosive environment well market.
most downhole
completion and artificial lift equipment does not
involve high technology, and the decisive factor for
foreign manufacturers to enter the field would be
profit potential, which could rise sharply if US manu-
facturers were forced out of markets because of
exceptionally high prices or trade restrictions.
Offshore Equipment
The tremendous growth of the offshore industry has
led to a diffusion of offshore technology and equip-
ment manufacturing capability to many countries
throughout the world, including Great Britain, Nor-
way, the Netherlands, France, Finland, Italy, Japan,
Brazil, and Japan. Numerous foreign engineering and
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Ocean Odyssey. Japanese-built,
semisubmersible drilling rig.
construction companies in Western Europe and East
Asia have the ability to design and construct the
largest and most advanced offshore drilling and pro-
duction platforms in use today. Moreover, in light of
the expected growth of offshore production and the
sizable capital investment it requires, many foreign
governments, including the United Kingdom, Nor-
way, France, and Italy, are trying to establish their
countries as leaders in offshore production technology
Subsea technology and equipment is perhaps the
major area of the offshore industry that was an
exclusive domain of US companies, but is no longer.
Although subsea technology originated in the United
States, many US companies have manufacturing
facilities in Europe, South America, and East Asia,
and licensing agreements have been made with nu-
merous major foreign firms. Although US firms still
have the most experience in engineering, manufactur-
ing, and installation of subsea equipment, British,
and manufacturing capability.
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French, Norwegian, and more recently Brazilian com-
panies have entered the subsea market with competi-
tive technology.
Technology and equipment to exploit offshore Arctic
resources are currently under development in a num-
ber of advanced countries that are vying for the
potentially large Arctic offshore market. Finland pro-
duces 60 percent of the world's icebreakers, needed to
support Arctic oil operations, and is an important
supplier of Arctic offshore drilling rigs and platforms
as well. Japanese companies have recently fabricated
large offshore drilling platforms for use in the Beau-
fort Sea offshore northern Alaska and Canada.F_
The offshore industry requires a large variety of other
specialized equipment and technologies as well, most
of it available abroad:
? Remotely Operated Vehicles (ROYs) have become
essential in deepwater production to service subsea
equipment, which is uneconomical to reach by
manned systems. France, Canada, Norway, Swe-
den, the United Kingdom, and Japan are all active
in ROV development.
? Companies in France, the Netherlands, the United
Kingdom, and Finland manufacture dynamic posi-
tioning systems and motion compensation systems
using sophisticated onboard computers to keep drill
ships stable and in position in deep water.
? Dutch and Italian companies are world leaders in
the design of heavy lift barges, and Japanese com-
panies, such as Sumitomo and Mitsui, have built the
majority of these massive vessels.
? Saipem of Italy is a world leader in deep sea
pipeline construction having constructed pipelines in
the Norwegian trench and in the Mediterranean at
depths up to 600 meters. France's ETPM is also
expert in underwater pipeline construction.
Transmission and Control Equipment
Virtually all technology and equipment involved in
building and operating crude oil and natural gas
pipelines are widely available abroad and, in some
Subsea oil systems are characterized by the use of a
nearby fixed platform as field center, with subsea
completed wells-single satellite wells or template
wells-connected to the platform. The fixed platform
provides all major functions and support, such as
manifolding, power supply, monitoring, control, and
processing. More advanced subsea technology and
concepts are being developed that use a distant
platform as a field center with a complex network of
subsea facilities that are installed and maintained
remotely. Subsea oil systems technology has largely
been derived from advances in the aerospace, nuclear
power, submarine, robotics, and automation indus-
tries.
cases, foreign manufacturers have the most advanced
technology and experience:
? Although many foreign steel mills produce line pipe
up to 48 inches in diameter, only a few countries
including West Germany, Italy, and Japan produce
56-inch-diameter pipe. In fact, 56-inch line pipe is
one of the few types of petroleum equipment that is
not produced in the United States.
? Gas turbines in all sizes are available from a
number of foreign suppliers, including Nuovo
Pignone of Italy, Hispano-Suiza of France, A. S.
Kongsberg of Norway, Sulzer and Brown Boveri
Compan BBC of Switzerland, and Hitachi of
Japan.
? High-capacity compressors are produced by many
foreign manufacturers, including competitive mod-
els produced by Nuovo Pignone of Italy and
Thomassen of the Netherlands. The market for
small gas compressors ranging in output from 10 to
800 horsepower (HP) is controlled by a few foreign
companies, including Atlas Copco of Sweden and
Demag of West Germany.
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? Pipeline instrumentation and control equipment-
such as supervisory control and data acquisition
(SCADA) systems-are available from suppliers in
France, the United Kingdom, West Germany, and
Japan.
? Although US companies still dominate the pipeline
inspection equipment market, British Gas Corpora-
tion is considered a particularly strong potential
challenger offering state-of-the-art equipment with
highly sophisticated computer instrumentation in-
corporated in the inspection tool.
? Large, specialized onshore pipeline construction
equipment, such as sideboom tractors, can only be
purchased from a few foreign countries. A US firm
and Komatsu of Japan control the world's supply of
large pipelaying vehicles.
Engineering and Project Management Services
Engineering and project management services are
essential elements of virtually all energy development
projects. Although US firms are still recognized as
the most skilled project managers, especially for
difficult projects that require high productivity and
completion in a minimum of time, foreign compa-
nies-such as Technip of France, Snamprogetti and
Saipem of Italy, Davy McKee and John Brown of the
United Kingdom, and the Japanese companies Mit-
subishi and Mitsui-are stiff competitors. In South-
east Asia, Japanese engineering is predominant but is
being challenged by competition from Korean firms. 25X1
Major West European firms are active in all other
areas of the non-Communist world. With the increas-
ingly fierce competition for major projects,
a trend is developing in which
US firms do the front-end engineering and design
work and overall project management, but foreign
companies receive the contracts for detailed engineer-
ing, procurement, and construction. This enables the
client to combine the best design and management
skills from the United States with less expensive
foreign construction-the major project expense.
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Offshore exploration in the Beaufort Sea has been
under way for 10 years, and a variety of techniques
for exploratory drilling in ice-infested waters have
been pioneered. Conventional drill ships have been
used during times of no ice or light ice, and icebreak-
ing tugs have been used to allow drill ships to remain
on station well into the winter. At protected sites
where ice motions are small, artificially thickened ice
platforms have been used successfully. By far the
most commonly used method of providing a drilling
platform has been the construction of artificial is-
lands made with sediment dredged from the nearby
sea floor or transported from shore. These islands
have been built in water up to 19 meters. Steel and
concrete refloatable, bottom founded structures are
also being developed.
Once oil or gas is found, exploration systems will be
replaced with even larger production systems de-
signed to last for roughly 20 years. Auxiliary sys-
tems, such as subsea pipelines and, in some cases,
subsea production systems, will be required and will
have to be protected from ice scour. Improved sen-
sors, such as radar, acoustics, and optics for detecting
ice threats against the production system, will be
required. Tankers used in conjunction with icebreak-
ers are possible alternative export systems to subsea
pipelines. Huge submarines have also been considered
as an export system.
cut-or an 18-percent reduction-in drilling expendi-
tures although the level of drilling activity remained
largely unchanged (table 2). The petroleum equipment
industry recession abroad was a depression in the
United States. Surplus manufacturing capacity devel-
oped in every segment of the service and supply
industry worldwide. The severe competition for re-
maining markets led to the increasing prominence of
low costs, concessionary financing, and special politi-
cal relationships as the primary factors in determining
which companies receive equipment and service con-
tracts. We expect these factors to continue to domi-
nate the international petroleum equipment market
over the decade.
In their competition abroad with foreign manufactur-
ers, US companies have been hit particularly hard
during the recession by the strength of the dollar,
traditionally higher labor costs, and older technology
in some equipment manufacturing processes. As a
result, some identical products cost far less to manu-
facture abroad than in the United States. For exam-
ple, steel made in South Korea costs approximately
one-third that made in the United States
Labor cost differentials are
evident in the wages paid to oil industry welders.)
Moreover, in a highly cost-conscious market, more
subjective considerations of technical superiority and
experience-areas of US strength-carry substantial-
As the petroleum equipment industry became broadly
internationalized in the early 1980s, it was hammered
by a severe worldwide recession following the dra-
matic downturn in oil demand and the ensuing drop-
off in oil prices. Global drilling expenditures outside
the Soviet Bloc-an important indicator of the health
of the petroleum equipment service industry-fell 35
percent in 1984 from its 1982 peak of $70.2 billion.
More than 81 percent of that drop-some $19.8
billion-occurred in US drilling expenditures, the
non-Communist world's largest market. Foreign mar-
kets suffered much less, experiencing a $4.5 billion
ly less weight in investment decisions. That the US
suffered as a result of these international competitive
forces is reflected in the precipitous slide of US
petroleum equipment exports from about $11 billion
in 1982 to about $5 billion in 1984, according to
official US trade statistics.
Intense competition has also increased the importance
of favorable financing arrangements in winning com-
petitive bids abroad, especially for major contracts.
project
financing dictates which companies receive business.
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British-built remotely operated
vehicle used for subsea repair
Balder. Japanese-built, off-
shore crane, 3,000-ton lifting
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Table 2
Non-Communist World Petroleum Industry
Drilling Expenditures
Average Annual
Growth Rate, 1985-90 a
Onshore
Offshore
Onshore
Offshore
Onshore
Offshore
Onshore
Offshore
Total
45.5
24.6
25.4
20.4
47.8
36.3
11.1
10.1
United States
37.7
6.8
19.5
5.2
34.5
8.1
10.0
7.7
Canada
2.2
1.4
1.6
1.3
4.4
4.1
18.4
21.1
Western Europe
0.4
7.1
0.3
5.2
0.7
9.2
15.2
10.0
Latin America
2.3
2.7
1.4
2.3
3.0
4.0
13.5
9.7
Middle East
1.0
1.9
0.8
2.0
1.8
3.0
14.5
7.0
Africa
0.9
1.9
0.8
1.8
1.6
3.1
12.2
9.5
East Asia
1.0
2.8
1.0
2.6
1.8
4.8
10.3
10.8
Foreign manufacturers can frequently offer more
attractive financing because of government support
and greater flexibility to engage in barter deals. For
instance, concessionary lending terms by the Export-
Import Bank of Japan are helping Japanese oil
development firms working offshore in Southeast
Asia. According to an authoritative oil industry publi-
cation, the Tokyo bank sets its loan rate for develop-
ment of overseas resources for import into Japan
between 6 and 7 percent, appreciably lower than
normal international commercial lending rates. Multi-
national trading companies from oil-importing coun-
tries, such as South Korea and Japan, have become
particularly adept at trading services for oil exports
from countries with low foreign currency reserves or
soft currency. South Korean companies are lifting
about 50,000 barrels per day (b/d) from Libya in
trade for a variety of engineering services. European
governments, particularly in France, West Germany,
and the United Kingdom, also have government-
backed financing programs and encourage barter
arrangements to support petroleum equipment ex-
ports. The United Kingdom's Export Credits Guaran-
tee Department (ECGD) is often cited by industry
sources as improving the competitive position of Brit-
ish equipment exporters.
Special political relationships-both positive and neg-
ative-have also affected the ability of Western
equipment suppliers to market their products. In
many cases, they determine which country's compa-
nies may even be considered for a contract. Most
important is the tendency-dictated by tradition and
local content law-for equipment purchasers to favor
domestic suppliers when they are available. As the
domestic equipment industries in new oil production
countries grow and become able to provide better
products, foreign suppliers are increasingly excluded
from the market. This trend has been noticeable in
Brazil and may soon be the case in India. Italy's long
relationship with Libya has provided important ad-
vantages in competing for oil service and construction
work there. Business trade-offs involved in such a
relationship led AGIP to agree to relatively unfavor-
able terms to develop Libya's offshore Bouri field in
large part because most of the construction work will
also be handled by Italian firms. The US industry's
relationship with Saudi Arabia and French involve-
ment in Algeria are somewhat similar in giving
preferential treatment to contractors.
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Adversarial political relationships and government
policies have a more immediate impact on the equip-
ment industry. Tehran's aversion to French or US
equipment and service companies and Iraq's parallel
reluctance to deal with Japanese equipment suppliers
restrict business alternatives, as do US restrictions on
equipment sales to the Soviet Union and Libya. On
balance, these political relationships appear to have
adversely affected the ability of the US petroleum
industry to compete abroad in recent years and have
expanded market and technological opportunities for
foreign suppliers.
Market Trends and Technology Development
We expect the international petroleum equipment
market to continue its steady recovery from its 1983
bottom but do not expect the market to reach its 1982
peak again until late this decade, and then only on a
current dollar basis. Such a recovery is predicated on
the absence of an oil price collapse that remains a
significant risk in the next few years. A less likely
risk-the major disruption of international oil trade
by war or political instability in major producing
countries-could drive the market up more quickly
than expected in response to escalating oil prices and
the possible need for emergency restoration. With
most forecasters expecting non-Communist world oil
demand to increase only modestly-average annual
growth between 0.5 and 2 percent over the balance of
the decade-we believe demand for equipment and
services will probably grow an average of 10 to 11
percent per year on a current basis as investors
recover from the precipitous drop of 1983 and antici-
pate significant real oil price increases in the 1990s.
The growth of industry investment and expenditures
will be uneven in its strength and geographical distri-
bution, however:
? The US onshore oil industry-which has tradition-
ally accounted for almost all oil industry invest-
ment-will be the slowest growing regional onshore
market over the balance of the decade. Still, we
expect the United States to constitute more than
half of the world's petroleum equipment market into
the 1990s.
? Among other onshore markets, those with the larg-
est accessible potential petroleum resources-the
Middle East and Latin America-will probably be
the focal point of exploration, development, and
production activities.
? Canada, starting from a small base, will be the
fastest growing national equipment market over the
balance of the decade as it moves to develop its
petroleum finds in the far north.
? Continued development of the North Sea will make 25X1
it the largest offshore market during the 1980s, but
growth rates will slow from peaks reached in the
late 1970s.
The dramatic shift in the international petroleum
equipment industry to a weakened and highly compet-
itive market in which the United States is the major,
but not uncontested, force is likely to continue. We
believe lower profitability and increased competitive-
ness will probably mean continuing corporate consoli-
dations among equipment companies in the industrial-
ized countries, especially in the United States, France,
and the United Kingdom. Moreover, increasingly
restrictive local content laws in oil-producing coun-
tries is likely to force further industry underutiliza-
tion, particularly at the low-technology fabrication
end of the petroleum equipment market.
Equipment development efforts will probably focus on
new materials and designs that will lower drilling
maintenance and service requirements and new pro-
duction equipment for harsh environments-both on-
shore and offshore. The need to develop marginal
offshore fields will lead to continued development of
simple, cost-effective subsea completion gear. Oil 25X1
companies will also be interested as always in any
technology capable of reducing exploration and devel-
opment costs-the major capital investment in any
petroleum program. These developments will all take
place in an industry that is in the midst of some
fundamental market changes with broad implications
for the future of the equipment industry.
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The Offshore Industry
The most important shift in the petroleum equipment
market is the greater role played by the offshore
market since the 1983 recession. The fall in offshore
investment in 1983 was much less than onshore
because of the longer time horizon for investment
payback and much larger sums needed to carry out a
single project. As a result, onshore and offshore
markets probably will grow at nearly the same rates
through the 1980s, although the offshore market will
be moving to new investment highs as the onshore
market tries to return to its 1982 peak. The offshore
market probably will become even more important in
the 1990s, further stimulating the growth of foreign
equipment suppliers. In particular, advanced compa-
nies in Western Europe and Japan and low cost
equipment manufacturers in Asia should benefit from
this trend.
The focus of offshore investment activities through
the balance of the 1980s will probably be in the
already established petroleum provinces of the North
Sea and the Gulf of Mexico with work in the new
Canadian offshore fields showing the fastest growth.
Efforts in the established petroleum provinces will
focus on adding new productive capacity near existing
fields and increasing the productivity of current oper-
ations. Total annual average spending on North Sea
projects is projected at more than $15 billion through
1990, according to recent industry studies, and we
expect suppliers in the United Kingdom and Norway
will receive most of the contracts for this develop-
ment. Canadian activities will focus on developing the
new resource base established off Newfoundland and
Labrador with US and Canadian companies probably
receiving most of this work (table 3)
We believe countries with large reserves and surplus
capacity, such as the Arab producers of the Persian
Gulf, will maintain programs at low levels while other
countries, such as Australia, Indonesia, India, Brazil,
and several West African countries, will move aggres-
sively to develop their offshore production potential.
Competition for contracts in the Third World will be
particularly intense, although most of the develop-
ment in more advanced nations will be handled by
local suppliers. We expect predrilling exploration to
occur primarily in the Norwegian Sea and Canadian
Arctic Ocean but do not foresee major capital invest-
ment in these regions until the next decade.
Table 3
World Offshore Outlook:
The $50 Billion Market
By category
Total
54.3
60.2
67.0
Development
23.2
26.2
29.9
Exploration and drilling
20.0
21.0
22.5
Operating costs
11.0
13.0
14.5
By region
16.6
18.2
21.1
5.3
5.7
6.0
74.0
34.4
23.6
16.0
22.6
6.4
As the offshore petroleum industry moves increasing-
ly into deeper water and hostile climates, new tech-
niques will be required in every phase of the industry.
In light of the restraining influence of flat oil prices,
however, most of the growth in the offshore industry
this decade will emphasize improved performance and
efficiency We would
expect the greatest technological innovation to occur
in geophysical equipment and possibly exploration
drilling techniques as the search for new oil moves
into very deep water-over 400 meters-and Arctic
environments. We also expect to see greater use of
subsea production systems that will make the develop-
ment of previously marginal oilfields economical and
enable operators to push into still deeper waters, 25X1
avoiding the dangers of rough or icy surface
conditions.
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Japanese/American design for
an all-season Arctic mobile
drilling platform
Oil operations will also increasingly use computer
technology. Software firms in Europe and the United
developing offshore capacity to meet growing demand
and possibly declining onshore oil production (table 4).
States are already offering programs for well plan-
ning, log analysis, casing, tubing and drill string
design, blowout controls, and directional drilling. The Onshore Industry
Computers are being used to monitor the performance Most onshore expenditures in the non-Communist
of equipment and to search for failure and dangers. world will continue to be made in the United States.
Computer-aided design (CAD) systems are playing a Major investments will be made both in finding new
major role in producing new floating structures oil and upgrading oil recovery from existing fields,
expected to replace traditional fixed platforms for
development of new deepwater finds. By the late
1990s major technological and engineering break-
throughs will probably be much more critical in
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Table 4
Current and Future Role of Electronics in the Oil Industry
MWD and rig floor sensors linked to computer 3-D holographic images to observe drilling progress
functions provide improved drilling efficiency. and the formation penetration. Robotic controls of
drilling operation.
All production, processing, and alarm inspec- Unmanned platform complexes to be operated onshore.
tion systems are automated control centers.
Seismic Ability to transmit and correct data on location. Following real-time interpretation, detailed seismic
Satellite telemetry can transmit real-time data. survey will commence immediately.
Design Computerized calculation and graphics enable Software will receive environmental, production input
engineers to design on a video terminal. and produce a completed design electronically.
Construction Computer-aided manufacturing. Computerization and robotics will provide fabrication
of basic and even customized structural elements.
Placement of mobile and fixed structures are Advanced modeling of mating, towing, and installation
conducted hypothetically on computer graphics. critical for deepwater, hostile environment.
Remote control, TV manipulators, All underwater operations will be conducted by remote
microprocessors. control and 3-D observation, assisted by artificial
intelligence.
Widespread use of SCADA for monitoring and Increased technical sophistication of systems.
control.
especially in Alaska. Oilmen expect that Canada and
Latin America will be the primary areas of new
foreign onshore drilling. Mexico, Venezuela, and
Colombia all have active onshore programs under
way. Mexico and Venezuela probably will continue
their efforts to replace onshore oil reserves and main-
tain productive capacity. Equipment markets else-
where will be closely linked to the local desire for
petroleum self-sufficiency or exports, domestic petro-
leum prospects, and political stability:
? Iran and Sudan, among others, are not likely to
attract major new investments despite their petro-
leum potential if more stable business environments
do not develop.
? Yemen Arab Republic (North Yemen) and Iraq, in
contrast, could be growing equipment markets.
? Major oil exporters with limited onshore reserves,
such as Nigeria and Indonesia, are likely to main-
tain programs to ensure reserve and productive
capacity stability.
Onshore petroleum programs, especially in the domi-
nant US market, are moving into deeper structures
with higher pressures and often extremely corrosive
petroleum. These conditions require new corrosion
resistant materials in drill pipes and casings such as
chromium steel and nickel alloys. Among the most
important new drilling developments likely to see
broad use in the next few years for both onshore and
offshore operations is MWD technology. MWD saves
drilling time and averts downhole accidents by provid-
ing operators immediate information on downhole
activity and environment through sensors or recorders
near the drill bit. Downhole motors and turbodrills
are being used in many straight-hole applications
because their increased reliability and higher torque
capability permit faster-and ultimately less expen-
sive-drilling. As with offshore activities, the use of
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computers for monitoring and control of production
operations is expected to grow tremendously. SCADA
systems have become widespread in production, pro-
cessing, and pipeline operations, and their use will
continue to increase in all phases of facility opera-
tions.
The USSR and China-The Special Cases
Ambitious energy goals in both the USSR and China
could mean a major expansion of Western business
opportunities well into the 1990s. Moscow, with the
need to defer or prevent substantial oil production
declines, faces serious technical problems in maintain-
ing production in Western Siberia, developing re-
serves in Central Asia,. andexploring the petroleum
potential of the offshore Arctic regions. Beijing will
need massive Western assistance to reach its goal to
double oil production by the end of the century
through a strategy of maintaining its mature onshore
fields, developing its offshore potential, and beginning
the search for oil in western China. Although these
national markets will remain relatively small-annual
average of less than $1 billion each in Western sales-
in the global petroleum market context, West Euro-
pean and Japanese companies are gearing up for
them. Companies who enter these markets early could
be in a better position for larger programs in the
1990s.
Soviet interest in Western technology will probably
increase as exploration and development shift to
deeper and more complex onshore and offshore depos-
its, especially as exploitation of the deep sulfurous
petroleum deposits in the Pre-Caspian Depression and
Central Asia proceeds. In areas where hydrogen
sulfide (HZS) and carbon dioxide (CO2) are present
under high pressure and temperature conditions, the
Soviets must acquire Western equipment including
sour oil and gas manifold systems and blowout pre-
ventors, as well as controls for severe service and sour
oil and gas processing and treating equipment. We
also believe the Soviets will buy large quantities of
basic oilfield equipment from the West, including
high-capacity submersible pumps, gas lift equipment,
drill pipe tool joints,-and drill bits. The Soviets are
also likely to continue relying on Western sources for
the bulk of their large diameter pipe and-despite
claims to the contrary-large numbers of gas tur-
bines. Although these needs are diverse, they repre-
sent only a modest part of a major undertaking the
The Soviet Union is also beginning to examine off-
shore Arctic areas as a possible major source of oil
supplies and may put increasing emphasis on the
exploration and development of the Barents and Kara
Seas if onshore oil production continues to decline as
we expect. By 1990 Moscow will probably add nine
drilling rigs to the three already operating in the
Barents and may ultimately spend nearly $8 billion
for Barents Sea petroleum development
Because of the numerous technical
challenges in exploiting offshore Arctic petroleum
resources, we believe the pace of Soviet exploration
and development will depend on Moscow's willingness
to permit a major role for Western firms in manning
and managing operations and possibly on the avail-
ability of Western financing
In contrast to the Soviet Union, China is actively
pursuing Western technology and equipment pur-
chases and licensing arrangements in its quest to
double crude oil production to 4 million b/d by 2000.
Numerous Western and Asian companies have signed
joint-venture agreements with the Chinese in areas
ranging from seismic equipment to gas turbine manu-
facturing. In these agreements, the foreign partner
usually provides the technology and training, and the
Chinese partner supplies all materials and labor. Not
unlike other new oil-producing LDCs, China's long-
term aim is to develop its own petroleum technology
and eventually export equipment and services.
Beijing wants to increase development and recovery in
existing onshore fields-including imports of well
stimulation and enhanced recovery technology-to
boost production with the least capital investment.
The Chinese are particularly concerned about sustain-
ing output through 1990 at the aging Daqing oilfield,
which produces half of China's oil. As a result, China
is looking for a full range of petroleum equipment,
including drilling technology and equipment, produc-
tion equipment-especially high-volume submersible
Soviets can largely execute themselves.
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Victor Muravlenko. Finnish-
built, dynamically positioned
drill ship~~
Soviet-commissioned jack-up
drilling rig under construction
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electric pumps, and oil and gas separation and dehy-
drating facilities. In addition, China needs advanced
seismic and geophysical equipment and services to
explore for petroleum in the isolated Western desert.
China's offshore equipment needs are currently cen-
tered on exploration and drilling-related equipment.
Offshore drilling more than doubled in 1984 over
1983 to a total of 45 exploratory wells and 30
development wells. Investment in offshore exploration
jumped from about $100 million in 1981 to $600-700
million in 1984. If commercial reserves are found,
China will need the full range of offshore development
and production equipment and services available in
the West. The apparent lack of success in offshore
exploration efforts so far has diminished the prospects
of a major offshore production equipment market in
China by 1990, however.
We expect the international petroleum equipment
industry to continue to evolve in a manner that erodes
the dominance of US equipment manufacturers both
in market share and technology leadership. West
European, Japanese, and Korean equipment manu-
facturers are likely to be the prime beneficiaries of
this shift, but protected oil-producing LDC markets in
countries such as Brazil and India also will lead to a
new competitive force at least locally. Foreign manu-
facturing cost and financing advantages-compound-
ed by the current strength of the dollar-and the
spread of US technology as well as the growth of
foreign petroleum technologies are critical-and
largely irreversible-factors in this process. More-
over, the slow shift of investment away from the
historically massive US onshore market to foreign
offshore markets will compound the problems of US
manufacturers who have traditionally had a sizable
home court advantage. US petroleum equipment sup-
pliers are likely to expand their manufacturing capa-
bilities abroad to remain competitive in foreign mar-
kets, continuing the downturn in US equipment
exports.
Besides greater competition abroad, the international-
ization process will lead to increasing penetration of
the US petroleum equipment market-still the
world's largest-at the lower end of the technology
range. The markets for high-technology and special-
ized equipment for particularly demanding conditions
and onshore drilling will still be dominated by US
companies and their foreign subsidiaries by the 1990s,
but we expect competition to increase from companies
in Western Europe and Japan.
The internationalization of the petroleum equipment
industry has severely reduced the effectiveness of US
unilateral export controls and, in our judgment, may
soon challenge the effectiveness of COCOM controls
on key dual-use equipment. Countries seeking equip-
ment covered by US unilateral export licensing con-
trols, such as the Soviet Union and Libya, can procure
comparable equipment in most cases from suppliers in
Western Europe, Japan, and occasionally from newly
industrialized countries, such as Brazil, Mexico,
Singapore, and South Korea when they cannot ac-
quire it indirectly from US manufacturers.
In the few cases where US sole-sourced items are
unilaterally denied a foreign country, we believe
foreign petroleum equipment manufacturers could
produce acceptable substitutes in one to two years if
the market size warranted. The knowledge to design
and produce most petroleum equipment is widespread,
and the delays in providing alternative equipment
would largely be attributable to the time to install a
suitable manufacturing capability. In major petro-
leum projects, a two-year leadtime in acquiring equip-
ment is largely inconsequential in economic terms
because long manufacturing and installation lead-
times and a long productive life are normally expected
for such equipment. Moreover, if foreign companies
grab markets from US companies, the foreign manu-
facturers will be in a stronger position to develop
better technology, manufacturing capability, and in-
ternational credibility to compete in what most ob-
servers expect will be a larger global petroleum
equipment market in the 1990s.
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Petroleum equipment trade with Communist coun-
tries-restricted by COCOM regulations when there
is a clear military dual-use technology involved-
could also soon be challenged by alternative supplies
from non-COCOM countries. Advanced countries
that are not COCOM members, such as Sweden and
Finland, have sophisticated petroleum industries that
can produce some equipment currently controlled by
COCOM. Although suppliers in the non-COCOM,
newly industrialized countries are not yet able to
manufacture COCOM-controlled petroleum equip-
ment, increasing local electronics manufacturing so-
phistication could give them such a capability in the
future. This changing pattern of petroleum equipment
technology availability indicates that multilateral co-
operation beyond COCOM may soon be needed to
prevent military-related technology embodied in
petroleum gear-particularly sophisticated explora-
tion sensing and processing equipment-from reach-
ing Bloc countries. However, agreement to expand the
control of sensitive oil and gas equipment sales beyond
COCOM will be difficult because of intense competi-
tive sales pressure and disinterest in the security
implications of such sales.
Despite the likely adverse trade consequences for the
United States, the increased equipment manufactur-
ing capacity in the non-Communist world-particu-
larly in the oil production and transmission sectors-
would permit quick expansion of production to replace
damaged equipment if a major oil supply source were
disrupted in the near future. The heightened competi-
tiveness of the industry has also led to reduced oil
exploration and development investment costs for oil-
importing countries, providing an incentive for more
exploration and an opportunity to reduce reliance on
vulnerable foreign oil sources, such as those in the
Persian Gulf. International technological competition
may soon enable economically attractive exploration
of oil in the most hostile environments and drilling
conditions, provide a capability to handle highly
pressurized and corrosive reservoirs, and recover addi-
tional reserves from fields now in decline. The current
global competition in petroleum equipment markets is
a strong inducement for innovation in petroleum
equipment products and manufacturing techniques
that is likely to be important in advancing petroleum
production and reserves in the 1990s when most
forecasters next anticipate a tight oil market.
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Appendix A
The Petroleum Equipment Industries
of Key Foreign Countries
This appendix describes the equipment industries of
major foreign petroleum equipment manufacturing
countries and highlights government policy supporting
the development of an indigenous equipment industry.
Other types of government support such as R&D and
export assistance in both major and minor oil-
producing countries are also discussed. Areas of spe-
cial manufacturing capability or technical expertise
are noted for each country as are key companies that
play an important international role.
Finland
The Finnish petroleum equipment industry has an
established reputation in the construction of special-
ized vessels and drilling rigs for the offshore industry.
Finland is one of the leading suppliers of Arctic
offshore drilling rigs. The Finnish shipbuilding indus-
try uses the most advanced technology available, and
its products are highly competitive in the world
marketplace in spite of relatively modest government
financial support by international standards.
Finland exports more than 80 percent of its shipbuild-
ing production and about 50 percent of its exports are
to the Soviet Union. Wartsila currently has a contract
with the USSR to build five construction crane vessels
for offshore operations. Rauma-Repola has fabricated
three advanced drillships for the Soviets and is cur-
rently constructing two jackups, all for Arctic opera-
tions. As of late 1983 the USSR had 22 vessels on
order with Finnish yards, including three research
vessels, four ocean tugs, two crane ships, four multi-
purpose carriers, two barge carriers, and five other
special-purpose vessels.
Finland is making a concerted effort in applied ice
research and icebreaking technology. A large test-
cone-type platform has been built recently at
Valmet's Helsinki shipyard for measuring forces of
ice against a fenced structure. Research work on ice
also is being carried out at Wartsila shipbuilding
company, the world's leading supplier of icebreakers.
Wartsila is the only shipbuilding firm that has the
ability to carry on basic and applied research, model
testing, product development design, production, and
full-scale testing. Additionally, the Finnish Govern-
ment operates a technical research center for studies
on ice mechanics, winter navigation, instrumentation
and measuring systems in cold climates, and Arctic
construction and marine technology.
Besides shipbuilding, Finnish companies are prepar-
ing to supply a range of offshore equipment to the
Soviet Union. As part of this effort, the Finnish
shipbuilder Valmet has just signed an agreement with
a major US company to apply its expertise gained in
the North Sea and Arctic Canada to the production of
jackets, decks, and topside modules-equipment that
can be used in the Barents Sea. Helsinki recently
signed a bilateral trade program to supply Moscow
offshore technology through 1985.
France
The French Government has actively supported the
development of an indigenous French oil equipment
industry for more than 20 years, and France is now
the second leading exporter of petroleum technology
and equipment. Cooperation between the government
and private industry was instrumental in achieving
this position. French policymakers have believed that
a large and technically advanced oil industry would
help France open up access to foreign oil resources
and improve the security of its oil supply position.
Overall French Government support for the develop-
ment of offshore technology probably exceeds any
other government, according to an authoritative
industry publication. In the early development of
France's offshore industry, the government decided to
reduce competition among domestic firms by assign-
ing research functions to specialized agencies. The
resulting developments were then licensed to private
firms for commercial applications.
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Much of the new technology and development pro-
duced by French industry originates within two major
government agencies, Institut Francais du Petrole
(IFP) and the French Research Institute for the
Exploitation of the Sea (IFREMER), which deal with
petroleum and oceanographic research, respectively.
Both work closely with the two major French interna-
tional oil companies, CFP-Total and ELF Aquitaine,
and a number of French international and domestic
petroleum equipment companies and contractors.
Areas of offshore technology where French industry is
now in the forefront include:
? Diving and advanced underwater work (COMEX).
? Flexible pipe (COFLEXIP).
? Directional drilling (CFP-Total, FORAMER).
? Deepwater drilling technology (Elf-Aquitaine,
Total).
? Production and subsea technology (ACB).
? Tension leg platforms (G. G. Doris, Bougyues Off-
shore, CFEM).
Examples of advanced French expertise include the
Upper Zakum Project off Abu Dhabi, engineered by
Serete, and the 1982 world deep sea drilling record of
1,714 meters set by Elf and Total. Elf, in association
with Total and I.F.P., is preparing equipment and
procedures for drilling a well in 3,000 meters of water
in the Mediterranean, far exceeding the current
record drilling depth of 1,965 meters by US Shell in
the Baltimore Canyon area off New Jersey.
The French Government recently has been wrestling
with severe problems in the French oil service industry
caused by the recession in the worldwide oil industry
and the lack of competitiveness of some French
equipment companies. According to the US Embassy
in Paris, sales of French petroleum equipment and
services fell from $9.1 billion in 1982 to about $6.6
billion in 1983, which was a steeper plunge than most
foreign equipment exporters during that depressed
period. Creusot-Loire, a major heavy equipment man-
ufacturer, collapsed last year, and a number of other
large firms including UIE (offshore platforms) and
Technip (engineering services) are in trouble. The US
Embassy in Paris reports that, although French sup-
pliers have raised the possibility of government assis-
tance to the industry in the form of new financing
schemes to foreign clients, officials
ado not envision their adoption.
Italy
State-financed companies hold a preeminent position
in Italy. The Italian petroleum industry falls under
the aegis of Ministry for State Participation, which, in
turn, controls two major groups, ENI and IRI. The
major petroleum-related entities within ENI are
AGIP, the national oil company, SNAM, the national
gas company, Saipem and Snamprogetti, competing
engineering and construction companies, and Nuovo
Pignone, a mechanical manufacturing company.
Among the energy-related suppliers within IRI are
Finsider in steel production, Fincantieri in ship, plat-
form, and drilling rig manufacturing, and Finmec-
canica and Selenia in electronics, control, and auto-
mation systems manufacturing. Despite the
dominance of large state companies, Italian indepen-
dents occupy important portions within the industry.
Micoperi in Milan and Belleli in Mantua are two
large private companies engaged in offshore petro-
leum design, fabrication, and construction work.
In addition, Tecnomare was founded in 1971 by a
group of Italian private and state companies interest-
ed in developing marine petroleum technology. Be-
sides innovative deepwater R&D and engineering,
Tecnomare is heavily involved in studies of petroleum
development in Arctic conditions. The banking group
IMI, which heads Tecnomare, is also responsible for
managing a state fund to finance applied offshore
research.
Major state involvement in all aspects of Italy's
petroleum industry has led to significant R&D bud-
gets that have propelled Italian companies to the
forefront of many areas of petroleum technology.
Major technologies and projects developed by Italian
companies include:
? The Transmed gas pipeline designed and construct-
ed by Snamprogetti and Saipem. Italian companies
are leaders in offshore pipeline construction and
have laid the deepest underwater pipeline in the
world-up to 610 meters.
? Tecnomare's design of the largest offshore steel
platform in the world for Phillips Petroleum's Mau-
reen field in the United Kingdom.
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? Development by AGIP and other Italian companies
of Libya's offshore Bouri field-the largest offshore
oilfield in the Mediterranean.
? Nuovo Pignone's development and use of the first
telemetry system for centralized control of several
drilling and process platforms offshore through a
command center on land.
Japan
Japan entered the field of international energy re-
source development late. Unlike Europe's experience
with the North Sea, Japan has no major petroleum
provinces to develop. With government assistance,
Japanese companies have had to slowly build exper-
tise in the upstream end of the petroleum business.
Today, Japanese companies are competitors in many
areas of the petroleum equipment industry, although
much Japanese equipment-particularly involving
drilling and production technology-is based on
licences and manufacturing arrangements with US
companies.
The Japan National Oil Corporation (JNOC) was
established by the government in 1967 to support and
encourage petroleum development initiated in the
Japanese private sector. JNOC provides equity capital
and loans, guarantees, and other forms of assistance
to Japanese oil companies. Further financial assis-
tance is supplied by the Export-Import Bank of Japan,
which provides attractive loan rates for companies
developing petroleum resources to be imported by
Japan. At the end of March 1983, equity capital
supplied by JNOC was 42 percent of Japan's entire
worldwide exploration and development capital in-
vestment of $1.2 billion. Japan aims to increase the
amount of oil supplied through Japanese companies to
some 1.2 million b/d in 1995 from the 1984 level of
300,000 b/d. Japanese petroleum equipment manu-
facturers benefit from Japanese development projects
because of Japanese companies' tendencies to rely on
indigenously manufactured equipment.
The Japanese petroleum equipment industry includes
both the general trading companies, such as Mitsui,
Mitsubishi, Sumitomo, and Nissho Iwai, and multina-
tional manufacturers, such as IHI, Hitachi Zosen,
Hitachi, and Toshiba. The interrelationship between
these companies is complex, and major projects often
involve a number of companies working together.
Japanese trading companies are particularly adept at
developing worldwide business opportunities and di-
recting business toward Japanese companies. Some of
the trading companies own their manufacturing facili-
ties, while others rely on affiliated companies. Gener-
al trading companies also do engineering and project
management work and have extensive research and
development facilities. Mitsui, for instance, has an
extensive Arctic ice engineering and construction
laboratory.
Japanese companies are particularly noted for their
expertise in petroleum equipment materials and fabri-
cation. Japanese steel companies are world leaders
with four companies-Nippon Steel, Nippon Kokan,
Kawasaki, and Sumitomo-ranking among the
world's top 10 steel producers. The world petroleum
industry has relied on the Japanese steel industry for
much of the major petroleum equipment fabrication
projects, ranging from offshore platforms to 56-inch
line pipe. Among the strengths of Japanese companies
are quality of product, broad product lines, the ability
to form consortiums with other Japanese steel mills to
meet large orders, and heavy investment in research
and development.
major thrusts of Sumitomo, Kawasaki, and Nippon
Kokan's marketing strategy appear to be increasing
emphasis on tubular products and increasing markets
in the Soviet Union and China. Nippon Steel is
expected to maintain its leading role in the worldwide
steel industry and concentrate on developing high
value-added products such as tubulars and surface-
treated steels.
Norway
Norwegian policy has been to maintain strict control
over oil and gas field development to ensure a steady
level of return to the state in capital investment and to
provide work for Norwegian fabrication yards and
Norwegian suppliers. Oslo's policy also emphasizes
the commitment of foreign R&D to Norwegian com-
panies. Between 1979 and 1986 a total of 19 foreign
firms will have to put up more than NKr 2 billion
($220 million) for some 512 projects under technology
agreements signed by the beginning of 1983. As in the
case of the United Kingdom, the Norwegians have
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used the oil and gas field licensing procedure to
implement these policies. Key criteria in their choice
of licenses include:
? Satisfactory participation by Statoil.
? Proof of ability to strengthen the Norwegian econo-
my, industrial growth, and employment.
? The applicant's past promotion of the use of Norwe-
gian goods and services.
As a result of this approach to industry development
and its experience in the North Sea, Norway is
becoming a technical leader in several essential off-
shore technologies, including seismic exploration,
drilling, and production, especially in sub-Arctic
waters. GECO, a subsidiary of Det Norske Veritas
partly owned by the Norwegian Government, is a
world leader in the development and use of sophisti-
cated offshore seismic equipment. A number of Nor-
wegian engineering companies, such as Aker Engi-
neering and Kvaerner Engineering, have developed
new technologies for deepwater drilling and produc-
tion. The oil division of Kongsberg Vapenfabrik is
planning to become a major force in the production of
subsea equipment and is working with a major US
company to manufacture equipment for use in the
deepwater fields in the North Sea. Kongsberg believes
that subsea production will probably expand rapidly
over the next five years as virtually every development
scheme in Norway's Continental Shelf will involve use
of such facilities. Norway is also among the technical
leaders in offshore electronics, advanced dynamic
positioning, and remotely operated underwater vehi-
cles (ROVs).
Much of the advanced research in petroleum technol-
ogy is carried out by Norwegian research organiza-
tions whose work is sought worldwide. Det Norske
Veritas is becoming a major force as a certifying
organization for offshore work and is creating compe-
tition for the American Petroleum Institute to the
dismay of US equipment suppliers. Foreign interest is
high in applying Norwegian expertise to Arctic waters
in Canada, Alaska, and the USSR. The Soviet Union
recently contracted with Norway's BOCONOR group
to sketch a "master plan" for Barents Sea develop-
ment projects. This plan, comprising both fixed plat-
forms and subsea production units, was presented to
the Soviets last year.
Sweden
Swedish petroleum equipment companies have estab-
lished a reputation in areas such as manufacturing
specialized steels (Sandvik, SKF), submersible tech-
nology (Sutec, Kockums) electronics/ communications
technologies (LM Erickson) and prime movers and
compressors (ASEA Stal-Laval). More recently,
Gotaverken Arendal (GVA) has emerged as a major
competitor in semisubmersible platform design and
construction.
The Swedish Government is particularly interested in
research and development in ocean technology and
has commenced a three-year national program to
develop Swedish qualifications and competence in the
field. The government has allocated $4 million for this
program to be managed by the Swedish Board for
Technical Development (STU). The areas of offshore
technology of particular interest to Sweden include:
? Underwater technology.
? Specialized steel technology for application in sour
gasfield development.
? Electronic technology for sensing, control, and data
processing.
? Arctic environment technology.
The National Defense Research Institute (FOA) spon-
sors a number of underwater technology projects that
have petroleum industry applications. Special exper-
tise has been developed in navigation and positioning
inside underwater structures, airborne laser bathyme-
try, obstacle mapping for Arctic shipping routes,
seismic exploration, and deep diving.
United Kingdom
Starting with the early development of the North Sea,
London has consistently followed an "open door"
policy to encourage multinational oil companies to
operate in the United Kingdom as long as they use
British supply firms as much as possible. British
policy was intended to create a British petroleum
equipment industry, which had been essentially non-
existent before 1965. This policy is implemented
through the mechanism of licensing of offshore
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blocks. The UK Department of Energy (DOE) judges
applicants competitively on the basis of their past or
intended contribution to the UK economy and their
past performance and future commitment to ensure
"full and fair opportunity for the UK industry to
compete for orders."
The DOE controls approval of each development
proposal and reviews the percentage of UK content
for each component and for the project as a whole.
Companies rarely request approval unless they have
an acceptably high percentage of UK content-
currently in excess of 70 percent.
The DOE's operational arm, the Offshore Supplies
Office (OSO), assigns an auditor to each operating
company and a major contractor to work on future
projects. OSO also receives quarterly reports after
contracts have been let to ensure that UK suppliers
have received "full and fair opportunity." Where UK
suppliers appear to be uncompetitive, OSO promotes
new ventures, advises on marketing arrangements,
sponsors R&D, and provides financial assistance in
collaboration with regional development authorities.
British firms now provide 70 percent of goods and
services used in oil and gas projects, up from only 10
percent in 1974, according to press reports.
The UK Government recently added two equipment
industry guidelines designed to improve industry's
international competitiveness:
? New offshore licenses are to be directly linked to an
applicant's readiness to involve UK industry in new
offshore technology and R&D projects.
? OSO and the offshore supply industry will actively
seek to promote exports of offshore equipment and
services.
The US Embassy in London reports that OSO has
started to implement the government's new policies.
In particular, a major US engineering and construc-
tion firm found it advisable to form a joint venture
with a UK-owned firm to secure work on a very large
offshore development project. This firm believes that
Britain will henceforth demand similar joint ventures
whenever US suppliers seek to obtain high-technology
contracts in the UK sector of the North Sea.
The structure of the UK offshore industry is undergo-
ing significant change from the boom years of the
1970s. It is making the sometimes painful transition
from a sector biased toward heavy engineering involv-
ing the construction of large offshore platforms in
Great Britain to one geared more toward technology
and design expertise which can be marketed abroad.
Areas identified by OSO for research and develop-
ment include:
? Marginal oil and gas field development.
? High-pressure deep gasfield development.
? Enhanced oil recovery, gas condensate development,
and heavy oil recovery.
The UK Government is also encouraging the further
development of subsea and ROV technology and
deviated and horizontal drilling in deep water.
West Germany
West German petroleum equipment companies are a
major force in the world petroleum equipment indus-
try. In 1983 West German companies were the largest
suppliers to the Soviet Union of machinery and
equipment for exploration, production, and pipeline
operation equipment-almost $400 million-and,
next to Japan, the second-largest supplier of pipe-
almost $700 million. Among the major contracts,
Mannesmann has supplied significant quantities of
large-diameter pipe for the Soviet gas pipeline to
Western Europe, and AEG Kanis has supplied gas
turbine engine parts.
Annual average sales of the German offshore industry
exceed $600 million with annual increases in sales of
all plant, equipment, and services in the offshore
sector averaging well above 10 percent over the last
five years. Besides the North Sea market, West
German companies are concentrating on Southeast 25X1
Asia and China offshore markets. The West German
offshore companies include:
? Major shipyards such as HDW and Blohm & Voss
with a comprehensive range of mobile exploration
platforms, special-purpose vessels ranging from
crane ships to launch barges, deck structures for
platforms, accommodation and production modules,
and icebreaking vessels of all types.
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? Smaller size shipyards, such as the Martin Jansen
and Paul Lindenau yards, with special-purpose ves-
sels such as supply vessels of all types, diving
support vessels, and geophysical and research
vessels.
? Companies in the materials technology sector, such
as Thyssen and VDM, with steel grades for all
environments including polar conditions.
? Mechanical engineering companies with specialized
equipment including Bruker in underwater technol-
ogy, MTU propulsion and drive systems, and
Paguag in flexible pipelines.
? Companies engaged in electrical engineering and
electronics, including AEG-Telefunken.
The Federal German Ministry for Research and
Technology has provided substantial R&D funds to
West German companies in the area of the German
ocean engineering industry. In particular, the German
Government has been interested in developing:
? Floating and stationary plants for the production
and processing of oil and natural gas from marginal
offshore deposits.
? Equipment, vehicles, processes, and services in the
field of underwater inspection, maintenance, and
repair of offshore installations.
? Development of vessels for special offshore duties
such as seismic survey and Arctic supply.
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