In Oil Rigs, It's China to the Rescue

A shortage of equipment has drilling companies increasingly looking East for reinforcements

Oil and gas drilling machines were among the few things that U.S. companies weren't getting from China. Now that's beginning to change, and it could help speed up production.

These days, oil drillers have to schmooze, beg, and pay a fortune to get machinery. Only 1,681 rigs were available for drilling in the U.S. in July, according to Houston oil field services firm Baker Hughes (BHI). Back in 1982 there were 4,436 rigs.

So company executives are scrabbling for the equipment—even the old pieces once abandoned in yards during the decades of languishing prices that lasted until the early 2000s. The shrunken industry can't make rigs fast enough, and it can take a year to deliver an order.


  Jim Nicklos, president of Houston-based Nicklos Drilling, knows this first hand. One night last year, gas escaped from his well, which was being drilled with U.S machinery, and the rig caught fire. When he visited the site the next day, Nicklos saw flames engulfing his rig with a roar like a jet engine's. The machinery burned for weeks before it finally tumbled and melted into what resembled charred iron. "It's not a pretty sight," Nicklos says.

But Nicklos didn't despair. About a month before his rig burned down, he met representatives of Baoji Oilfield Machinery, or BOMCO, the largest machinery manufacturer under China National Petroleum in Houston.

He asked BOMCO if they could furnish a rig for him, and the next day they agreed. They negotiated the price quickly and had a purchase order for Nicklos within a week. BOMCO delivered the new rig to Nicklos roughly six months later, in January, 2006, making it possible for him to continue developing his gas reserves.

Chinese manufacturers such as BOMCO are playing an increasingly important role in the production of equipment used for oil and gas drilling. Industry publication Land Rig Newsletter says China has delivered about 12 rigs to the U.S. since 2005, and it expects that number to double by early next year. It also estimates that a Chinese-made rig costs 25% less than one from the U.S.


  Those savings won't necessarily get passed on to drilling-rig customers, but the use of Chinese rigs "definitely has the potential to create more supply of rigs in the U.S.," says Gene Shiels, assistant director of investor relations at Baker Hughes.

That's welcome, since recent shortages have driven prices sky high. Currently, land-rig rates can range from $8,500 to $31,500 per day, depending on the rig class and market.

Until recent years, the U.S. demand for new drilling machinery wasn't strong enough to fuel many Chinese imports. As prices languished in the 1990s, land drilling machinery equipment makers fired workers and slashed their businesses.

The Chinese, on the other hand, were building their oil fields without much regard for market forces. Now, manufacturers there have more capacity to meet the strong demand for equipment this year.

Most of China's natural-gas reserves are on land, so the country has less experience in offshore drilling. However, Chinese energy companies have been selling drilling services to foreigners for years. State-owned integrated oil and gas company China National Petroleum claims on its Web site to be the largest drilling contractor in Kazakhstan, Venezuela, and Sudan. In 2005, CNPC extended its drilling service reach to the U.S., with three rigs.


  Chinese services can be a boon for smaller exploration and development companies in the U.S. "We don't have large contracts at these [rig-building] yards. We're not looking for a dozen [rigs]," says David Wheeler, executive vice-president of independent exploration and development company Presco in Woodlands, Tex.

When Wheeler orders a rig from a U.S. yard, he has to wait for many others to be built first, he says. He has found that he can get a rig from China much faster. And with commodities prices soaring, no one wants to wait.

Wheeler contracted a Chinese rig in July, 2005, from Houston drilling-services company GTS Drilling, which had obtained the rig from HongHua, a supplier in Guanghan City, China. Presco used the rig in the Rocky Mountains until November, drilling five wells that season.

Without the Chinese rig, it would have managed only one or two. "We would have delayed everything for a year," Wheeler says.

Larger companies are also turning to China for rigs. Bermuda-based Nabors Industries (NBR) ordered about 75 new rigs from HongHua for delivery starting in January, 2006.

Most of the rigs will go to the U.S., while the other third are for foreign drilling locations such as Venezuela and Algeria. Nabors' equipment makes up a large share of the 270 new rigs that Land Rig Newsletter says are being built this year.


  HongHua is using Nabors' design for this giant order, under supervision from 14 Nabors employees. The rigs will be finished in Houston, and not every piece of the equipment in them comes from HongHua. Nabors is using engines from Peoria (Ill.)-based construction and mining equipment provider Caterpillar (CAT), for example.

While Nabors is one of the first major drillers with strong U.S. ties to make its rigs in China, it isn't alone. Houston-based Parker Drilling is building nine rigs in China this year. Kerui Group is building four land rigs as part of Parker's joint venture with its Saudi Arabian counterpart, Abdullah Rasheed Al-Rushaid Company for Drilling Oil & Gas. BOMCO is building the remaining five.

"We chose to build these rigs in China due to delivery requirements and associated cost," says David Mannon, senior vice-president and chief operating officer of Parker Drilling. He adds that most of the equipment in the rigs came from European or North American suppliers, "to ensure consistent quality and workmanship standards." The Chinese yards just built the steelwork and integrated this equipment.

While oil prices pulled back the week of Aug. 14, to around $70 a barrel, many analysts expect the price to hold above $65. If so, the demand for rigs is likely to remain robust.

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