Oil and Gas Field Machinery and Equipment

SIC 3533

Companies in this industry

Industry report:

This category covers establishments primarily engaged in manufacturing machinery and equipment for use in oil and gas fields or for drilling water wells, including portable drilling rigs. Establishments primarily engaged in manufacturing offshore oil and gas well drilling and production platforms are classified in SIC 3731: Ship Building and Repairing.

Industry Snapshot

The health of the oil and gas field machinery industry is inextricably tied to capital expenditures in the oil and gas extraction industries whose health in turn is dependent on the price of oil. Fortunes of the oil industry are also very cyclical. The later years of the 1990s saw a plethora of oil and gas field industry acquisitions and mergers. Companies were attempting to diversify products, capitalize on new technologies and innovations, improve efficiency, and reduce costs.

According to Dun & Bradstreet, 1,365 establishments employed 36,900 workers in the oil and gas field machinery industry in 2010. Total annual industry revenues were estimated at $47.2 billion. Texas employed the most workers in the industry by far, accounting for more than 60 percent of all employees. Other states that had significant numbers of workers in the industry included Louisiana, with 11 percent of employees; Oklahoma, with 10 percent; and Illinois, with 6 percent. Texas was also the number-one state in terms of revenues.

Organization and Structure

The oil and gas field machinery industry includes field tools, oil derricks, drilling rigs and tools, well logging and surveying equipment, and general gas well and oil field machinery and equipment. Many companies exist in the United States that make specialty drilling equipment and other related machinery. Other companies, such as machine tool makers, produce smaller parts either for assembly at the more specialized companies or to meet replacement needs while the rig is in service. The companies producing drilling rigs usually maintain a field service department. Private consulting firms, however, may also specialize in field repair of all oil field related equipment. Oil and gas field machinery companies thus provide equipment and services to the oil industry that are used in drilling, testing, and finishing oil and gas wells, as well as enhancing existing wells. Equipment may be premanufactured or it may be built and assembled in the field. These companies may also provide on-site service once a well begins operating. Customers of the industry are oil and gas producers and drilling companies. In the United States, approximately 97 percent of the drilling rigs are owned by drilling contractors, not the oil and gas producers.

The oil industry finds itself variously controlled, compromised, regulated, influenced, and lobbied for or against by organizations like the Organization of Petroleum Exporting Countries (OPEC), the American Petroleum Institute, the ever volatile geopolitics of the Middle East, and the vagaries of the American consumer. Domestically, the industry is also controlled, to a great extent, by regulations imposed by the U.S. government and the governments of international competitors. The Environmental Protection Agency places stringent restrictions on companies selling crude oil, which ultimately affects the cost of producing oil. This can drive profits downward, especially if coupled with low oil prices. Given these conditions, oil drilling is performed more and more by major oil-selling companies like Exxon, Texaco, and Citgo. This is in sharp contrast to the early 1980s, when drilling rigs were common sights in the front yards of southern and midwestern private homes.

Any decrease in drilling activity worldwide adversely affects the oil and gas field machinery industry. Smaller support machinery businesses that thrived in the early 1980s amid high oil prices either went out of business or were bought out. This trend continued throughout the 1990s, and by the end of the decade, the industry consisted mostly of very large, well-diversified companies. For example, IRI National of Houston and Norways's HitecASA merged to form IRI Hitec, which focused on the design, engineering, and manufacturing of technically advanced offshore and land-based drilling equipment. In 1997, the Halliburton Company acquired the Numar Corporation, and in 1998, it acquired Dresser, making Halliburton the largest provider of oil field services. Halliburton purchased Dresser so as to bring together oil field, engineering, and construction services. Numar was purchased because of its patented Magnetic Resonance Imaging Logging tool that evaluated subsurface rock formations in new wells. Another important industry event was the 1998 acquisition of Western Atlas by Baker Hughes. By the late 1990s, the three dominant companies in the industry were Halliburton, Schlumberger Ltd., and Baker Hughes.

Basically, the same principles were employed in the 2000s as in the past. Aside from the demise of oil derricks, which had given way to pumping units, and the off-shore drilling methods used along the coast lines, the industry had not radically changed since its inception. The oil drilling industry could be summarized as an evolution of improved techniques that was expected to continue as long as oil lies beneath the earth's surface.

Background and Development

In the United States, oil drilling evolved as a result of seeking salt brine. Without refrigeration, one of the few means of preserving meat was through packing it with salt. Therefore, salt brine was a commodity in heavy demand. In 1806, two brothers, David and Joseph Ruffner, established a business supplying settlers near Charleston, West Virginia, with salt brine. Quickly, the demand for the salt became so great that the brothers devised a way to drill a hole to intercept the flow of the brine seepage. This well, responsible for developing the spring pole and drilling line, was the first well drilled in America with tools. From this point, other types of wells were drilled in the Ruffner fashion. In 1814, near Burkesville, Kentucky, the "American Well" was drilled, which was 475 feet deep and supposedly produced 1,000 barrels of oil per day.

The invention of the steam engine in tandem with cable tools changed the nature of oil and gas drilling from 1860 to 1930. During this time, crude oil was gaining favor as an illuminant, replacing whale oil used for lamps. Also, the use of machinery to aid man's endeavors was more widespread, and crude oil was known to be an excellent lubricant. Its use as a fuel was also gaining popularity. These three developments created a demand for oil drilling; thus the industry gained momentum. The first well drilled in America strictly for oil production to supply the machinery industry was the Drake well. Following the Drake well, patent applications were filed in abundance for a wide assortment of tools, rigs, and machines to support oil drilling activities. Among these patents were predecessors to common modern oil industry machinery, including rolling cutter rock bits, an offshore drilling rig, and rotary and percussion motion devices.

From this point, the oil boom was upon the world. An oil field in Corsicana, Texas, was the first well to catapult the industry into the powerful economic prominence it holds today. In this oil field, the Lucas Spindletop well "blew" on January 10, 1901. Once it was contained, it produced approximately 75,000 to 80,000 barrels per day. Exploratory drilling in the Gulf Coastal Plain areas of Texas and Louisiana became commonplace and produced abundant supplies of oil. Likewise, oil fields in California and the midwestern plain states were cropping up.

It was not until the 1930s that oil drilling became a science. Although the American Petroleum Institute organized its first equipment standardization committee in 1925, the industry did not really become specialized for another five to ten years. Before the 1930s, the parts of an oil drilling rig were made for other machines. While these makeshift rigs were practical and effective enough to achieve the purpose intended, vast improvements were necessary to efficiently produce oil with less waste. Mechanical engineers and petroleum engineers started designing oil field machinery and tools. From these efforts, the following were created: better tooth and ball bearing designs of rock bits, roller bearing enclosed engines, automatic controls for steam generating plants, and gas engine electric generator sets with motors. Also, drilling rig personnel were becoming more educated about professional and safety practices.

By the 1970s, the Organisation of Petroleum Exporting Countries (OPEC) produced more than half the world's oil. For a variety of reasons, most of which had little to do with supply and demand, OPEC began aggressively pricing oil, and consumers were willing to meet their price. But OPEC could not maintain production quotas among its members. Subsequently, the market was soon glutted with oil, and prices fell. Demand for OPEC oil fell from 31 million barrels a day in 1979 to 17 million barrels a day in 1985. In 1997 and 1998, OPEC again boosted production as demand growth stagnated due to global economic problems.

OPEC's determination to cut production in the early 2000s caused an increase in prices of oil. As stated previously, the price of a barrel of West Texas intermediate crude oil jumped from $12.00 a barrel in early 1999 to $18.50 a barrel by May of that year. In spite of this rise in the price of a barrel of oil, oilfield activity remained low in 1999. For instance, the Baker Hughes rig count (the number of oil drilling rigs exploring for oil and gas) was at 507 in June 1999, down 42 percent from May 1998 but a bit higher than the April 1999 count of 488 rigs. This, in fact, was the lowest number since Baker Hughes began counting rigs in 1944.

However, U.S. Industry & Trade Outlook '99 quoted an Offshore Data Services report showing a worldwide offshore rig fleet utilization rate of 95.6 percent, which reflected a steady rise since a 1986 low. High rig utilization rates are usually a precursor to rising day rates, which is the price paid to a drilling contractor for a day's work, which in turn reflects higher profits. In addition, the Energy Information Administration predicted an increase in the energy market share of petroleum from 38 percent (1996) to 40 percent in 2020, which would increase exploratory drilling and perhaps contribute to rig shortages.

On the other hand, the 1998 domestic rig count by the Reed Tool Co. showed U.S. rig utilization at 77 percent in mid-1998, down from 87 percent a year earlier. The report also showed that while day rates for offshore rigs increased 62 percent in 1997 and 17 percent in 1998, the rate for land rigs fell 5 percent in 1998 after a 1997 increase of 19 percent. Between mid-1998 and early 1999, however, it was likely that onshore and offshore utilization rates slipped and day rates declined significantly due to a decline in drilling activity. Making predictions even murkier was uncertainty over the amount of oil Iraq would be allowed to sell because of United Nations (UN) sanctions resulting from the Persian Gulf War, oil discoveries in Algeria and Nigeria, and Venezuelan plans to increase production.

Because of forecasts showing firm prices and solid demand growth, oil and gas companies spent more money on exploration and production. Capital expenditures, however, declined 5 percent in 1998. Capital expenditures by oil and gas companies represent, of course, the total revenue of the oil and gas field machinery industry. For the period 1988-1998, U.S. industry capital spending outlays averaged about $34.5 billion a year.

The oil industry suffered further volatility during the early 2000s, caused by global oversupply and the U.S. war against Iraq in 2003 that led oil prices to spike to $40 a barrel. Usually, high oil prices provoke increased exploration and drilling, which, in turn, fuel the oil and gas field machinery industry. However, because economic uncertainty remained high and consumer confidence low, during 2003, higher prices did not instantly spur new oil and gas field development.

In 2001, the value of shipments for the industry was estimated to be over $6.3 billion. Just as the oil and gas industry was recovering from the topsy-turvy events of late 1990s that saw prices swing widely, the industry was once again challenged by the political and economic conditions of the early 2000s. The terrorist attacks of September 11, 2001, pushed a slow downturn in the economy into a freefall, and the commercial and industrial sectors stalled out. Hoped-for recovery in 2002 did not materialize, and in December 2002, workers at Venezuela's national oil production facility went on strike, causing an upset in the U.S. import supplies of crude. On the heels of the strike came the U.S. war against Iraq, which briefly drove prices to $40 per barrel before returning to the mid-$20 range. Global oversupply also threatened the industry's delicate equilibrium in the early 2000s.

Oil prices rose steadily in the 2000s, peaking in May 2008 at $126.06 a barrel, according to the U.S. Energy Information Association. From there, prices fluctuated but never went below $42.07 a barrel, which occurred in January 2009. In April 2010, the global price for a barrel of oil had settled at $83.56, whereas the U.S. price was slightly less at $74.56 in July 2010. Regardless of price, the future of oil remained a hotly debated subject in the United States and around the world.

As a result of the turmoil within the oil and gas industry, oil field equipment manufacturing struggled, leading to a flurry of mergers and acquisitions. Despite the short-range difficulties, many predicted long-range growth in the industry. The world's peak oil-producing years were projected to be coming in the years 2020-2030 or earlier. Also, because the use of natural gas was on the rise in the United States, especially as a means to generate electricity, natural gas drilling services and supplies were expected to continue to be a viable market well into the twenty-first century's early decades.

Current Conditions

The pressure was on oil field machinery producers in 2010 after an explosion on the offshore drilling rig Deepwater Horizon, leased by oil company BP and working off the coast of Louisiana in the Gulf of Mexico, caused 11 deaths and the largest oil spill in history. The accident occurred on April 20, 2010, and left the oil well gushing an estimated 1.5 million to 2.5 million gallons of crude oil into the ocean each day. The leak could not be stopped until July 15, 2010, when BP announced that the well had been capped. Concerns about a leak, however, were ongoing, and relief wells were being drilled to relieve the pressure. By that time, hundreds of millions of gallons of oil had spilled into the ocean, causing severe damage to marine life and wildlife habitats, as well as the Gulf Shore's fishing and tourism industries.

Although BP was held responsible by the U.S. government and was given the task of (and the bill for) cleaning up the spill, oil field equipment manufacturer Halliburton was in the hot spot as well, as several of that firm's employees were working on the rig when it exploded. According to a press release by Halliburton, the company "performed a variety of services on the rig, including cementing, and had four employees stationed on the rig at the time of the accident."

Investigations into the Gulf oil spill as well as various litigation actions were ongoing in mid-2010, and the ramifications of the event on the oil field equipment industry were still not entirely realized. President Obama initiated a six-month ban on offshore drilling after the accident, which a federal judge subsequently lifted and the presidential administration appealed. According to Business Week, a reinstatement of the moratorium could cut U.S. oil production by 70,000 barrels a day in 2011. Overall, much of the oil field industry was "in limbo," according to OPEC secretary-general Salem El-Badri.

In the oil industry overall, OPEC Energy Commissioner Gunther Oettinger stated in a July 2010 Europe-East article that there was some oversupply in the oil market but that he hoped it would soon be "absorbed." Oettinger went on to say that "Rules for fixing price are okay. There is nothing to do in terms of more regulation. Price is important for consumers, growth of the economy, but also for investment." Crude oil prices fell 10 percent between April and June 2010, according to Business Week, as the global economic slowdown kept demand low. In fact, according to the U.S. Energy Information Administration (EIA), demand for all petroleum-based transportation fuels, including gasoline, diesel, and jet fuel, fell 7.1 percent in 2008, as consumers cut back on unnecssary travel. The EIA reported that 2008 showed the steepest one-year decline in fuel consumption since at least 1950. Whereas some industry experts predicted that the use of gasoline in the United States would continue to decline, others predicted a rebound in the industry. Globally, the International Energy Agency predicted that oil demand would increase 1.4 percent annually from 2009 to 2015.

Industry Leaders

Most large firms in this industry provided oil field services in the areas of drilling/evaluation and completion/production. Three dominant players in 2010, all located in Houston, were Halliburton Co., Baker Hughes Inc., and Schlumberger Ltd.

Halliburton's purchase of Dresser Industries in 1998 made it the world's largest supplier of oil field services. The firm had sales of $14.6 billion in 2009 with 51,000 employees. Halliburton was involved in everything from locating hydrocarbons to producing oil and gas.

Baker Hughes was formed in 1987 when, amid a global oil slump, Baker Oil Tools and the Hughes Tool Company merged. In 1998, Baker Hughes merged with Western Atlas to form the third largest oil field services firm, which retained the name Baker Hughes. The company continued to make oil field equipment and provide oil field services for drilling, completing, and operating oil and gas wells. Baker Hughes Inc. moved ahead in the industry when it acquired oil field services provider BJ Services for $5.5 billion in 2010. The previous year, Baker Hughes had 34,400 employees and sales of $9.6 billion.

Schlumberger Ltd. made several acquisitions in the 2000s, including three firms that provided seismic data services: VoxelVision (in 2003), Odegaard A/S (in 2006), and Geosystem (in 2007). The company also had plans for a major acquisition in 2010, when it announced it would buy Smith International, an oil and gas services company that had sales of $8.2 billion in 2009. Schlumberger reported revenues of $22.7 billion in 2009.

Workforce

Between 1982 and 1994, over half of the establishments in this industry either went out of business or were consumed by larger companies. This trend continued throughout the remaining years of the decade. In 2001, total employment in the industry was 27,666. Although the total number of establishments decreased, employment was on the upswing. By 2007, employment had reached 44,846, according to the U.S. Census Bureau. About 63 percent of employees in the industry were production workers.

The industry is primarily composed of blue-collar workers, such as welders, assemblers, machinists, and machine builders. The strongest employment opportunities in the late 2000s were found in the fields of service and technical support rather than in the production of new units. While employment of machine assemblers in the general construction and related machinery industry was expected to increase, significant cuts were expected in almost all other areas, especially machine builders and operators and clerical staff.

Research and Technology

A study by the Gas Research Institute predicted that ultra deep-water drilling would grow from 3 percent of total offshore activity in 2000 to 24 percent by 2015. Drilling trends in the industry favored looking at deeper and deeper wells, especially in offshore drilling. This trend was based on new technologies and favorable regulatory rulings. In 1987, Shell Oil broke the water-depth record by drilling a well in 7,520 feet of water; Chevron Texaco subsequently broke Shell's record in 2003 when its Transocean drill ship drilled in 10,011 feet of water. By 2003, more than 60 percent of the oil produced by the United States came from deep-water wells.

The oil and gas field machinery industry was also looking at exotic materials to enhance efficiency. For example, a JIP between RTI Energy and Grant Prideco produced and put into use a titanium drill pipe. The pipe was designed with high stress, short radius drilling applications in mind. The titanium drill pipe, which was fitted with fatigue resistant steel tool joints, was resistant to chemicals and weighed half as much as steel with twice the flexibility.

After the Gulf oil spill in April 2010, companies focused research on safety and reliability of equipment. For example, in June 2010, Halliburton announced the opening of a $15 million test facility in Oklahoma that would test the firm's proprietary oil and gas field services equipment under simulated stressful conditions.

© COPYRIGHT 2018 The Gale Group, Inc. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. For permission to reuse this article, contact the Copyright Clearance Center.

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