By Charlie Zhu and Andrew Callus
April 15 (Reuters) - Global oil companies are increasinglyturning to China for services and equipment, attracted by lowercosts and a newly acquired expertise that is challenging moreestablished rivals.
State-run and privately controlled Chinese rig makers, oiland gas services and engineering firms are showing up in thesupply chain everywhere from the Middle East, the North Sea andNorth America to frontier areas like Mozambique.
Chinese yards, having come from nowhere in less than adecade, are building more jack-up rigs - the most commonoffshore rig used for shallow water drilling - than all theother yards in the world put together, data from industryconsultants IHS Petrodata shows.
Helped by strong government support, plentiful labour and anabundant supply of raw materials like steel, China could becomea major offshore oil equipment manufacturing hub in less than 10years, industry executives say, just like Singapore and SouthKorea overtook the United States and Europe in the 1990s.
"The Chinese provide products with better value," said ScottDarling, Hong-Kong based head of Asia oil and gas research atJPMorgan, which hosted an investor tour of the Middle East lastmonth to study the competitiveness of Chinese energy equipmentand services suppliers. "And they are experts in managing supplychains, thanks to their domestic experiences."
The rise of Chinese energy equipment manufacturers andservices firms overseas, partly fuelled by the rapid expansionof state energy giants, is putting pressure on establishedcompanies including Singapore oil rig makers Keppel Corp and Sembcorp Marine, and land drilling giantNational-Oilwell Varco Inc (NOV).
To stay ahead, both Keppel and Sembcorp are increasinglybuilding more sophisticated equipment, an area where Chinesefirms still lack expertise.<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^GRAPHIC-China's offshore rig orders:http://link.reuters.com/cen38v^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Leading the Chinese overseas expansion are state-controlledshipyards and units of state giants China National PetroleumCorp (CNPC), parent of PetroChina , Sinopec Group and China National OffshoreOil Corp (CNOOC).
Chinese companies won over half the global orders for jackuprigs 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 ofprivately run companies have emerged as major overseas players.These include Honghua Group Ltd, the second-largestland rig manufacturer globally with 80 percent of revenue drivenby overseas orders, and Hilong Holding Ltd, whichstarted its overseas foray in 2005 and is now the world'ssecond-largest drill pipe maker after Houston-based NOV.
"Drill pipes are crucial to oil producers. Previously theirdrilling 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 energyfirms trying to cut costs, the affordability of the servicesoffered by Chinese firms has trumped their relative lack ofexperience.
Exxon Mobil Corp, Total SA, BP PLC and Royal Dutch Shell have all pledged to cap spendingdue to pressure from their shareholders, who want more generouspayouts before cyclical oil prices start heading lower.
China's oil and petrochemical equipment exports wereaveraging at around $18 billion a year in the past few years,equivalent to the annual capital spending budget of a mid-sizedinternational oil company, industry data showed.
Shell is currently the biggest buyer of equipment andservices from China among its foreign rivals. Its Chinaprocurement jumped to $3 billion last year from $1.9 billion in2012 and $1 billion a year earlier, Shell China spokesmanJiangtao Shi said, adding that one third of its 2013 Chinaprocurement 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, YantaiCIMC Raffles and Offshore Oil Engineering Corp canbuild a jack-up rig for $170-180 million, significantly lowerthan the $200-220 million price tag for the same rig built inSingapore.
Chinese manufacturers can also make land rigs, drillingpipes, bits, modules, pumps and valves at up to half the priceof the same equipment made elsewhere. Prices are so competitivethat the United States in 2012 slapped hefty anti-dumping dutieson imports of Chinese seamless steel pipes, including pipes usedfor oil and gas drilling.
"We export a lot of petroleum and petrochemical gears. Mostof them are crude and clunky stuff but we make money from them,"Zhang Kang, senior consultant at Sinopec, told Reuters. "We alsotry to make more sophisticated equipment."
MADE IN CHINA, FOR THE WORLD
As relative newcomers, Chinese companies remain far behindin terms of making sophisticated tools like deepwater rigs andhydraulic fracturing, or fracking, equipment which is used toextract natural gas trapped in shale formations.
They also lag in building complicated petrochemical andliquefied natural gas plants, a business still dominated byJapanese, Korean and European firms.
The Chinese firms are rapidly gaining know-how, helped byglobal firms such as Shell which is working to improve thetechnical qualifications and standards of its Chinese suppliersto make them part of its global purchasing network.
Shell has started using robot hydraulic fracturing equipmentmade at its China joint venture with CNPC at projects in Chinaand Australia, with the aim of deploying the kit to Canada laterthis year, Shell's Shi said.
"Our growing procurement spend in China is a reflection ofthe progress we are making in implementing one of our strategicpriorities in China, which is taking Chinese enterprisesoverseas," he said.
($1 = 6.2180 Chinese yuan) (Editing by Miral Fahmy)
