By Charlie Zhu and Andrew Callus
(Reuters) - Global oil companies are increasingly turning to China for services and equipment, attracted by lower costs and a newly acquired expertise that is challenging more established rivals.
State-run and privately controlled Chinese rig makers, oil and gas services and engineering firms are showing up in the supply chain everywhere from the Middle East, the North Sea and North America to frontier areas like Mozambique.
Chinese yards, having come from nowhere in less than a decade, are building more jack-up rigs - the most common offshore rig used for shallow water drilling - than all the other yards in the world put together, data from industry consultants IHS Petrodata shows.
Helped by strong government support, plentiful labour and an abundant supply of raw materials like steel, China could become a major offshore oil equipment manufacturing hub in less than 10 years, industry executives say, just like Singapore and South Korea overtook the United States and Europe in the 1990s.
"The Chinese provide products with better value," said Scott Darling, Hong-Kong based head of Asia oil and gas research at JPMorgan, which hosted an investor tour of the Middle East last month to study the competitiveness of Chinese energy equipment and services suppliers. "And they are experts in managing supply chains, thanks to their domestic experiences."
The rise of Chinese energy equipment manufacturers and services firms overseas, partly fuelled by the rapid expansion of state energy giants, is putting pressure on established companies including Singapore oil rig makers Keppel Corp and Sembcorp Marine, and land drilling giant National-Oilwell Varco Inc (NOV).
To stay ahead, both Keppel and Sembcorp are increasingly building more sophisticated equipment, an area where Chinese firms still lack expertise.
GRAPHIC-China's offshore rig orders: http://link.reuters.com/cen38v
Leading the Chinese overseas expansion are state-controlled shipyards and units of state giants China National Petroleum Corp (CNPC) [CNPET.UL], parent of PetroChina, Sinopec Group and China National Offshore Oil Corp (CNOOC).
Chinese companies won over half the global orders for jackup rigs last year, up from around a third between 2008 and 2012, data from IHS Petrodata showed.
In the area of land drilling equipment, a number of privately run companies have emerged as major overseas players. These include Honghua Group Ltd, the second-largest land rig manufacturer globally with 80 percent of revenue driven by overseas orders, and Hilong Holding Ltd, which started its overseas foray in 2005 and is now the world's second-largest drill pipe maker after Houston-based NOV.
"Drill pipes are crucial to oil producers. Previously their drilling schedules were sort of dictated by just one company, NOV," Amy Zhang, Hilong's chief strategy officer, told Reuters.
"Now clients have more options. We filled in the gaps."
CRUDE AND CLUNKY
Manufacturing energy equipment is an expensive, labour-intensive and lengthy process, and with global energy firms trying to cut costs, the affordability of the services offered by Chinese firms has trumped their relative lack of experience.
Exxon Mobil Corp, Total SA, BP PLC and Royal Dutch Shell have all pledged to cap spending due to pressure from their shareholders, who want more generous payouts before cyclical oil prices start heading lower.
China's oil and petrochemical equipment exports were averaging at around $18 billion a year in the past few years, equivalent to the annual capital spending budget of a mid-sized international oil company, industry data showed.
Shell is currently the biggest buyer of equipment and services from China among its foreign rivals. Its China procurement jumped to $3 billion last year from $1.9 billion in 2012 and $1 billion a year earlier, Shell China spokesman Jiangtao Shi said, adding that one third of its 2013 China procurement was earmarked for projects outside China.
Lower costs appear to be one of the main attractions.
COSCO Corp, China State Shipbuilding Corp, China Shipbuilding Industry Corp, Yantai CIMC Raffles and Offshore Oil Engineering Corp can build a jack-up rig for $170-180 million, significantly lower than the $200-220 million price tag for the same rig built in Singapore.
Chinese manufacturers can also make land rigs, drilling pipes, bits, modules, pumps and valves at up to half the price of the same equipment made elsewhere. Prices are so competitive that the United States in 2012 slapped hefty anti-dumping duties on imports of Chinese seamless steel pipes, including pipes used for oil and gas drilling.
"We export a lot of petroleum and petrochemical gears. Most of them are crude and clunky stuff but we make money from them," Zhang Kang, senior consultant at Sinopec, told Reuters. "We also try to make more sophisticated equipment."
MADE IN CHINA, FOR THE WORLD
As relative newcomers, Chinese companies remain far behind in terms of making sophisticated tools like deepwater rigs and hydraulic fracturing, or fracking, equipment which is used to extract natural gas trapped in shale formations.
They also lag in building complicated petrochemical and liquefied natural gas plants, a business still dominated by Japanese, Korean and European firms.
The Chinese firms are rapidly gaining know-how, helped by global firms such as Shell which is working to improve the technical qualifications and standards of its Chinese suppliers to make them part of its global purchasing network.
Shell has started using robot hydraulic fracturing equipment made at its China joint venture with CNPC at projects in China and Australia, with the aim of deploying the kit to Canada later this year, Shell's Shi said.
"Our growing procurement spend in China is a reflection of the progress we are making in implementing one of our strategic priorities in China, which is taking Chinese enterprises overseas," he said.
($1 = 6.2180 Chinese yuan)
(Editing by Miral Fahmy)
