Upstream Oil and Gas Equipment

Transcription

1 2015 Top Markets Report Upstream Oil and Gas Equipment A Market Assessment Tool for U.S. Exporters July 2015 U.S. Department of Commerce International Trade Administration Industry & Analysis (I&A)

2 Industry & Analysis (I&A) staff of industry, trade and economic analysts devise and implement international trade, investment, and export promotion strategies that strengthen the global competitiveness of U.S. industries. These initiatives unlock export, and investment opportunities for U.S. businesses by combining in-depth quantitative and qualitative analysis with ITA s industry relationships. For more information, visit I&A is part of the International Trade Administration, whose mission is to create prosperity by strengthening the competitiveness of U.S. industry, promoting trade and investment, and ensuring fair trade and compliance with trade laws and agreements. Julius Svoboda served as the lead author of this report. A special note of thanks goes to Julie Al-Saadawi, Kevin Quinlan, Amy Kreps, Alex Mourant, Sarah Lawson, Devin Horne, and Jessica Cuy, whose thoughtful gathering of market intelligence and trade data facilitated the completion of the study. In addition, several insights were garnered from conversations with, and edits by Adam O Malley and Man Cho, as well as Business Monitor International.

3 Table of Contents Executive Summary and Key Findings... 3 Country Case Studies Australia Brazil Canada China Colombia Ghana Israel Mexico Norway United Arab Emirates Burma Mozambique Sector Snapshots Unconventional O&G Offshore Ultra-Deepwater O&G Development Appendices Appendix 1: Methodology Appendix 2: Full Country Rankings Appendix 3: Resources... 51

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5 Executive Summary and Key Findings Significant global energy demand growth and rising living standards in China, India, and the Middle East, coupled with technological breakthroughs continue to alter the fundamentals of oil and gas (O&G) production, creating unprecedented opportunities for U.S. O&G equipment exporters in the near-term. New technologies have allowed the development of O&G resources that were previously considered uneconomic. The dramatic changes in the sector offer new commercial opportunities for U.S. O&G equipment manufacturers to penetrate new markets, gain share in existing markets, and revisit previously declining or over-regulated markets despite declining global oil and gas prices. These fast-developing trends also present an important opportunity for U.S. O&G equipment sales through focused export promotion efforts. ITA s 2015 O&G Equipment Top Markets Report ranks 75 markets based on export potential for U.S. O&G technologies through The report is designed to help U.S. companies identify those O&G markets where export activities can make the biggest impact. Each market has different challenges and opportunities and thus business leaders will need to adapt commercial and development strategies within each market accordingly. ITA believes that by evaluating a country s market size, resource endowment, and investment climate, appropriate strategies become clear. In particular, we note that exporters should also consider the risk and potential reward associated with each market. The rankings in the study represent those countries with the greatest potential for U.S. exports (see Table 1: Top 30 Oil & Gas Export Markets). However, higher rankings do not necessarily indicate markets with the greatest commercial opportunities, but rather a country where there is commercial activity in the oil and gas sector. The ranking is meant as a descriptive ranking where exporters are likely to have a higher chance of finding commercials opportunities. The greatest market opportunities for O&G equipment exports include Australia, Brazil, Canada, China, Colombia, Ghana, Israel, Mexico, Norway, and the United Arab Emirates. Burma and Mozambique are also projected to become major sources of investment and export destinations for U.S. equipment manufacturers. The 2015 O&G Equipment Top Markets Report highlights the opportunities and challenges for U.S. businesses in these markets. Our methodology identified additional potential markets as well as countries to watch. The case studies in this report were selected based on commercial opportunity and interest from U.S. exporters. (see Appendix I: Country Rankings, for the full list of country rankings) Overview of the Upstream Oil & Gas Equipment Market For the purposes of this report, the upstream O&G equipment industry is defined as establishments primarily engaged in: 1) Manufacturing of O&G field machinery and equipment; 2) Manufacturing O&G field production machinery and equipment; 3) Manufacturing O&G field derricks; and, 4) Manufacturing pipe and tube. Table 1: Projected Top Markets for Upstream Oil and Gas Equipment Exports ( ) 1. Canada 7. UAE 13. Saudi Arabia 19. Ghana 25. Trinidad & Tobago 2. Colombia 8 Nigeria 14. Angola 20. Russia 26. Turkey 3. Brazil 9. China 15. Bahrain 21. Equ. Guinea 27. Malaysia 4. Mexico 10. Venezuela 16. Israel 22. Singapore 28. Qatar 5. Australia 11. Oman 17. Ecuador 23. Peru 29. Algeria 6. Norway 12. United Kingdom 18. Iraq 24. India 30. Chile 2015 Oil and Gas Top Markets Report 3

6 Figure 1: World Market for Oil & Gas Equipment in billions dollars $180 $168 $158 $160 $142 $132 $134 $139 $140 $120 $110 $100 $79 $80 $66 $55 $60 $44 $36 $40 $20 $ Source: UN trade data, using exports to the world The United States is home to many upstream O&G equipment industry companies and U.S. companies are competitive internationally in this field. Over the past ten years, the global market for upstream O&G equipment has increased by a compounded annual growth rate of 12.2 percent, from $36 billion (bn) in 2002 to $138.9bn in 2013 (see Figure 1: World Market for Oil & Gas Equipment). World exports peaked at $168 bn in 2011 but remained substantial thereafter ($142 bn in 2012). We expect world exports to increase in the years ahead, consistent with intensifying demand in emerging markets and growing demand for innovative upstream technologies in which U.S. firms excel. The significant market growth over the previous decade demonstrates expanding energy needs worldwide and increased demand for equipment within this sector. Today the United States is the world s third largest exporter of equipment in the O&G sector, with close to $14bn in exports. In 2013, Korea represented 18 percent of global exports; China represented 15 percent while the United States represented 10 percent of these exports by value. However, the United States share of the global market for equipment is shrinking, while exports from the United States are projected to reach $19.1bn by 2018, the total of U.S. global market share is projected to decline to below 10 percent (see Figure 2: Top 5 Exporting Countries for Oil & Gas Equipment (Including Pipe)). The changes in the international O&G equipment market place are the result of increased competition from East Asian suppliers and greater demand for equipment within the United States. Increased manufacturing capabilities and low-cost production has allowed Chinese firms to displace U.S. market share particularly in low-tech parts and components. At the same time, the shale gas boom has increased demand for equipment, both foreign and domestic, in the United States, decreasing U.S. exports. It is important to consider the nuances of the O&G industry when evaluating international opportunities. The O&G industry includes a wide variety of products and thus the export profile of the United States varies considerably relative to other markets. Some markets that are long established O&G producers demand capital-intensive high-tech seismic and drilling equipment, while other markets that have just discovered O&G resources seek to import for more conventional drilling equipment and services for infrastructure development. Regardless of market, U.S. exports are often differentiated from those of other countries by type U.S. exports are particularly competitive in high end sinking and boring parts and parts for derricks, whereas those from Korea are concentrated in vessels with derricks with little sinking or boring parts and those from China are concentrated in vessels with drilling platforms and equipment and pipe. These trends will likely continue with U.S. exports weighted more toward specialized high tech exports especially relating to unconventional O&G production. The projected increase in demand for exports of O&G equipment products may be further driven by the fundamental changes in U.S. O&G production in the last several years. Having been among the first in the world to develop unconventional and ultra-deepwater 2015 Oil and Gas Top Markets Report 4

7 Figure 2: Top 5 Exporting Countries for Oil & Gas Equipment (Including Pipe) billion U.S. dollars South Korea China USA Brazil Japan $40 $30 $20 $10 $ Source: UN export data resources, U.S. equipment manufacturers and service suppliers have the opportunity to seize the first-mover advantage in overseas markets that are seeking to emulate the United States rapid expansion in energy production. In addition to being a large exporter, the United States is also a large importer of O&G field equipment and pipe. With about $12 billion in imports in 2013, the United States was the largest importer of O&G equipment, purchasing about 9 percent of all global O&G equipment sold worldwide. Other large importers include Singapore with a 6 percent share of global imports, as well as the UAE, Mexico, Netherlands, Canada, Norway and China, which each capture three percent. Recently, the value of U.S. imports and exports began to converge, likely as a result of increased investment and production in unconventional resources such as shale gas and shale oil, as well as increased investment in the Outer Continental Shelf in the U.S. Gulf of Mexico. Although the equipment sector is having an increasingly negative impact on the U.S. balance of trade, the decline in exports represents an increase in O&G activities and foreign investments in the United States O&G sector overall. Rankings in a Risk/Reward Context The O&G sector can generate large profits, but has always been characterized by a high degree of risk. O&G companies are faced by a number of risks not only related to finding oil or gas under the ground, but also financial, political and security risks that exist above ground. The 2015 O&G Equipment Top Markets Report analyzes those countries with the most potential for equipment sales against the associated risks and rewards of that country s O&G sector. The top 20 countries from the 2015 O&G Equipment Top Markets Report are plotted below on a Risk-Reward Matrix, which illustrates each country s relative upstream risks and rewards. The rewards are heavily weighted toward below ground resources, while the risks are more weighted toward above ground government policy. In a case such as Norway, which has large O&G reserves, a company might encounter few unanticipated regulatory challenges (i.e. low risk), but would also have lower profits (i.e. lower reward) from investments. In contrast, a country such as Ghana may potentially yield significant profits in the O&G equipment sector, but there are a greater number of risks (i.e. import regulations, corruption, infrastructure constraints) that companies will have to consider when conducting business there. Export Strategy Considerations Analyzing markets against the risk/reward matrix provides a framework by which exporters can apply strategies for markets based on specific criteria. The 2015 O&G Equipment Top Markets Report uses the risk/reward matrix, expertise from our Commercial Service Officers in country and sector-specific analysis to provide a suite of policy options to support U.S. O&G equipment exports. The 2015 O&G Equipment Top Markets Report outlines a set of export strategies focused on O&G equipment exports that will have different options for specific markets. Segmenting those markets with large U.S. market share and small U.S. market share will impact 2015 Oil and Gas Top Markets Report 5

8 Table 2: Differentiated Export Strategies by Market Size/Type Risk/ Reward Quadrant High Risk/High Reward Low Risk/High Reward Low Risk/Low Reward High Risk/Low Reward Large U.S. Market Share Export Strategy Engage with the U.S. Commercial Service to better understand specific risks of exporting. Research regulatory constraints impacting targeted portfolios of the oil and gas sector. Export strategy can be focused directly on business development. Identify major operators in country. Maintain perspective on the state of hydrocarbon development. Determine if product is appropriate for the state of development of a particular market s oil & gas sector. Research presence of foreign competitors. Engage with U.S. Commercial Service to understand specific risks of exporting. Work with established chambers of commerce in country to reduce risks. Examples Saudi Arabia Canada, Colombia, Australia Ghana, United Kingdom Mexico Risk/ Reward Quadrant High Risk/High Reward Low Risk/High Reward Low Risk/Low Reward High Risk/Low Reward Small U.S. Market Share Export Strategy Engage with the U.S. Commercial Service to better understand specific risks of exporting. Short-term delivery contracts to reduce market exposure. Understand import regulations and other potential import restrictions. Long-term business development strategy if no competitors present in market. Attend trade shows in country if appropriate. Establish business relationship with major operators in country. Limit business development activities if market does not appear to be appropriate for product or service. Work with U.S. Commercial Service to understand market restrictions (sanctions, import tariffs, etc.) Link with local companies or regional distributers. Limit exposure to market in the event of regulatory disruptions. Examples Iraq, China, Brazil Oman Norway, Bahrain Burma the types of commercial export strategies that could be deployed. We have added an additional layer to the risk/reward analysis: the market share captured by U.S. O&G equipment exporters already in the market. As U.S. companies have flexibility in terms of selecting target markets, the extent to which U.S. exports have penetrated a particular market is an indicator of the ability of supporting additional U.S. companies to export to that country. A large U.S. market share in a country indicates a more favorable commercial environment for private sector companies, while a small U.S. market share could indicate a more restrictive commercial environment. Given these macro differences, export strategies in the O&G sector should be adjusted and accommodate the difference respective to a country s commercial challenges and opportunities. Countries with little U.S. market share and low risk could indicate a number of challenges, both above ground and below ground. In Norway, for example, declining production may be impacting U.S. commercial interests, limiting U.S. market share. In markets with little U.S. market share and high risk, U.S. exporters should consider a different export strategy. Instead, business development may be less aggressive to limit exposure to potential institutional, regulatory, or market barriers. For instance, in China regulatory challenges often present intractable barriers that keep U.S. market share low. However, countries with large U.S. market share and are low risk should deserve more attention with a clear focus on sustained business development. Especially for companies that are new to export, exploring business development opportunities in countries with wellestablished O&G sectors with many foreign companies can reduce exposure to risk and profit loss Oil and Gas Top Markets Report 6

9 Methodology Ample data exist to analyze upstream O&G exploration equipment, allowing detailed export and import projections and trends through The analysis in this report relies primarily on export data to support the policy recommendations. To determine its rankings, the 2015 O&G Equipment Top Markets Report employed a modified score card analysis that grouped countries with greater or lesser amounts of opportunities for increased exports from the United States. The score card methodology used in this study employed qualitative and quantitative indicators to measure future opportunity for exports from the United States. Indicators included are: (i) proximity of a country to the United States; (ii) U.S. export trends for O&G field equipment; (iii) the U.S. share and the market size of a country s O&G equipment imports; (iv) a country s future natural gas and oil production and reserves; (v) total upstream project investments in the country; (vi) an institutional risk assessment variable; (vii) and a qualitative ranking of the country as an export destination (see Appendix I: Methodology, for greater detail of the O&G top markets methodology). For each of the major export opportunity indicators, the quantitative information was ranked and then regrouped into quartiles for each of the 75 key countries involved in upstream activities. The score for each indicator was an average of the quartile ranking across the sub categories, which are then summed for a final score. Using quartiles allows for relative rankings rather than absolute rankings; that is, the rank is an indicator showing whether the export opportunity indicator is a high (quartile rank 4), medium high (quartile rank 3), medium/low (quartile rank 2), or small/low range (quartile rank 1). Analyzed as a whole, this approach allows the top prospective markets across multiple best categories to rise to the top. Caveats The 2015 O&G Equipment Top Markets Report focuses on upstream U.S. O&G equipment exports to draw larger conclusions about the nature of the global O&G sector as a whole. As export data on services is neither readily available nor consistent across markets, trade statistics for O&G equipment are used as a proxy indicator for services exports. If a country imports O&G equipment, it will likely have associated trade in services related to O&G exploration and production as well. Figure 3: Import Markets* for Equipment & Pipe for the Top 20 Markets Source: UN Trade Data and BMI Research Risk/Reward Model for Oil & Gas, 2014 *bubble size represents projected U.S. market share in 2018 Australia, 16% ($3.8B) Norway, 8% ($1.7B) low risk, high reward Canada, 50% ($5.2B) UK, 11% ($2.4B) low risk, low reward UAE, 0% ($4.0B) Israel, 40% ($1.3B) China, 11% ($1.6B) Oman, 10% ($1.0B) Colombia, 26% ($1.3B) Bahrain, 38% ($0.2B) Ghana, 19% ($0.9B) high risk, high reward Brazil, 21% ($2.1B) Iraq, 9% ($2.7B) Venezuela, 17% ($2.3B) Saudi, 20% ($7.3B) Angola, 91% ($1.2B) Nigeria, 7% ($0.9B) Russia, 6% ($3.0B) Mexico, 65% ($1.6B) high risk, low reward Ecuador, 18% ($0.9B) More Reward Upstream Reward Less Reward Less Risky Upstream Risk More Risky Oil and Gas Top Markets Report 7

10 The report uses country data on O&G resource endowments as an indicator of demand for O&G equipment, but does not evaluate international trade in crude oil or natural gas. The U.S. government promotes the export of equipment for O&G exploration, production, transportation, refining and storage. However, the International Trade Administration does not promote the export of U.S. produced crude oil or U.S. produced natural gas. This analysis also does not take into consideration the recent fluctuations in the international price of oil and its impacts on the O&G sector. While the price of crude oil will impact a company s investment decisions, this report employs historical data to analyze global exports of equipment and current O&G resource endowments. Case Studies Ten countries were identified from the top 20 for greater analysis: Australia, Brazil, Canada, Colombia, China, Ghana, Israel, Mexico, Norway, and the United Arab Emirates. Mozambique and Burma were also added as countries to watch, as they are both emerging with significant resource endowments, but those resources have only been developed in a limited manner to date. The markets in the 2015 O&G Equipment Top Markets Report represent a range of opportunities to demonstrate the typography of commercially focused opportunities in the O&G sector. The full list of rankings is located in Appendix II: Full Country Rankings. In addition, a discussion on U.S. equipment exports focused on the unconventional O&G development and ultra-deepwater sub-sectors is also included as well as address the individual country analyses Oil and Gas Top Markets Report 8

11 Country Case Studies The following pages include country case studies that summarize U.S. oil and gas equipment export opportunities in selected markets. The overviews outline ITA s analysis of the U.S. export potential in each market. The markets represent a range of countries to illustrate a variety of points not the top markets overall Oil and Gas Top Markets Report 9

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13 Australia Type: Large U.S. Market Share Overall Rank: 5 Australia was the third largest liquefied natural gas (LNG) exporter in 2013 and has large natural gas reserves (much in shale). Australia is poised to become a substantially larger producer by The Australian government estimates that natural gas will account for 24 percent of Australia s energy consumption by 2020 and will grow twice as fast as other energy sources. Resources are located primarily in the western part of the country, but most consumption takes place in the east, requiring substantial infrastructure to connect the two regions. Despite U.S. competitiveness in the O&G equipment sector, we project U.S. market share in Australia to decrease relative to other countries. Australia represents a mid-sized global import market for O&G field equipment. The United States currently represents a significant share of Australian imports of O&G field equipment. For example, Australia imports $800 million of parts for derricks and the United States represents about 27 percent of the market. For parts for boring and sinking machines, Australia s import market is $715 million and the U.S. market share is about 20 percent. There is room to expand U.S. exports of parts (the greatest proportion of U.S. O&G equipment exports) into this market. In 2013, Australia was the tenth largest destination for U.S. exports of O&G field equipment, with almost $400 million exports (less than 3 percent of U.S. exports). U.S. exports to Australia of O&G equipment had been $625 million in 2008 and peaked in 2012 at over $720 million. Parts and attachments for boring and sinking equipment and derricks continually represent about 70 percent of the U.S. exports in this category. Australia is the thirteenth largest importer of O&G equipment globally, representing less than 3 percent of global imports in Its largest imports were parts for sinking and boring machinery and derricks and some large diameter oil line pipe, representing 29, 24 and 16 percent of its imports respectively. Japan, China and the United States are its largest import sources of pipe in 2013, capturing 27, 19, and 15 percent of Australia s import market respectively. It should be noted that approximately 50 percent of the U.S. market share is in high tech U.S. parts. Policy Context: Challenges and Opportunities The Australian O&G industry s revenue reached $40 billion in timeframe, with an annual growth rate of around 10 percent. The industry is expected to grow strongly over the next five years, largely due to the development of LNG facilities and the development of indigenous coal-seam gas. Approximately 40 percent of the machinery for the country s LNG projects is imported. This reflects Australians preference for high quality and reliable machinery to help offset the high capital and depreciation costs for the industry and to enhance worker safety. These are the equipment categories where U.S. exporters will likely see the most commercial potential. Gas production is forecasted to grow tremendously to billion cubic meters (bcm) by 2023, from 49.8 bcm in 2013 and 133.7bcm in Many of Australia s new gas field developments are tied to liquefaction projects that have several export contracts in place. Several major new LNG projects are under construction or in advance planning stages to support Asia s increased demand for natural gas Oil and Gas Top Markets Report 11

14 The Australian North West Shelf in the Carnarvon Basin has some of Australia s most mature fields and is the prime source for the North West Shelf LNG terminal. There are several other projects in the West and North West that are projected to come on line in 2016 or soon thereafter. Most of Australia s big reserves of shale are in the Cooper Basin in its interior. Australia will need substantial equipment to develop the area as well as to build infrastructure to connect the production to the consumption areas in the East. This represents an opportunity for U.S. mid-stream equipment and service supplier for pipeline infrastructure development, gas processing and storage, and delivery to local utilities and retail customers. Australia s management of oil exploration and production is divided between the states and the federal government. Australia s states manage the application for the onshore exploration and production project and the federal government handles the offshore portion. The natural gas industry is regulated at the federal level by the Department of Resources, Energy and Tourism (RET) and the Ministerial Council of Energy (MCE), which coordinates between the federal and states governments. Because Australia has a stable political environment, relatively transparent regulatory structure, substantial reserves, and close proximity to the Asian markets, it is an attractive place for investment both domestic and international. Almost 2,200 companies were operating in O&G extraction in Australia in 2012, including large international companies-- Apache, BP, Chevron, Conoco-Phillips, ExxonMobil and Shell as well as service companies such as Halliburton, Schlumberger, and Technip. Large Australian companies include BHP- Billiton, Woodside and Santos. The large companies generated most of the output. Australia imports significant oil today and even though new oil production is not likely to make up for current declining oil productions until about 2018, the government is trying to attract investment from international oil companies to develop offshore blocks by holding regular licensing rounds to release acreage for exploration each year. The 2011 round was the largest release in a decade. The 2014 release offered 33 offshore blocks, including a second release of three blocks from the 2013 round spanning four basins mostly in Western Australia and the Northern Territory. Western Australia held a separate licensing round in 2014 for five onshore blocks including those in the Canning Basin and the Perth Basin and the state of Queensland called for cash tenders for another six onshore areas. The 2013 offshore petroleum exploration release included 31 blocks in 6 basins, mostly off Western Australia, the Northern Territory and Victoria. As of June 2014, nine of the blocks were awarded. Recommendations for Export Strategies Australia is a country with significant amounts of hydrocarbon resources, a well-developed O&G sector, but declining U.S. export market share. It is a low risk/high reward country, and export strategies should focus on partnerships with established operators in country. Companies can expect to establish long-term business relationships considering the regulatory and commercial stability of the Australian market. All the major U.S. O&G companies work in Australia and Australian O&G companies hold production blocks in the United States, so commercial exchange between both countries is both positive and reciprocal. A subsector focus would be infrastructure development and expansion, and regions of focus would be west Australia s energy resources. U.S. mid-stream companies may find new business in projects that support the effort to link Australia s western resources to population centers in the eastern portion of the country Oil and Gas Top Markets Report 12

15 Brazil Type: Large Market; Large Market Share Overall Rank: 3 The development of Brazil s offshore pre-salt resources will sustain production increases if operators can successfully navigate the burdensome regulatory environment. While Brazil is currently the fourth largest destination of U.S. O&G equipment exports, amounting to $550 million in 2013, local content requirements (LCRs) hinder the sector s expansion and increased production. With the reelection of President Rousseff, sweeping regulatory change is not anticipated, but we believe companies can expect progress, albeit slow, in the coming years toward a more market-based commercial environment for its O&G sector. Brazil is the world s tenth largest oil producer, 90 percent of which comes from its offshore deposits. The development of deep-water and especially pre-salt resources have driven dramatic increases in Brazil s production as well as accounting for some of the world s largest finds over the past decade. Pre-salt production has tripled since 2012 and now accounts for a quarter of the country s overall output. By 2020 Brazil aims to produce four million barrels a day and rank among the world s top five producers. By that time, some $400 billion may be invested in Brazil s exploration and production sector. Brazil is currently the fourth largest destination of U.S. O&G equipment exports, amounting to $550 million in Although these exports have declined from a peak of over $1.03 billion in 2011, we anticipate U.S. exports will reach similar levels again by 2018 when Brazil will represent about 5.5 percent of U.S. exports of O&G equipment. In 2013, more than 80 percent of the U.S. exports to Brazil were parts for derricks, and sinking and boring equipment. Of Brazil s approximately $2.9 billion in O&G field equipment imports in 2013, the United States was the largest source for Brazil s imports with 20 percent, followed by China, Japan, and the United Kingdom with 16, 14, and 11 percent market share, respectively. Beyond the parts it imports, Brazil also imports stainless casing and tubing for O&G drilling, much of which originates in Japan, Spain, and Germany. We anticipate the U.S. market share of the Brazilian market for equipment may increase slightly by Challenges and Opportunities Along with other successful deep-water license offerings, Brazil held its first and only pre-salt bid round in 2013 amid great anticipation. However, only one consortium led by state-controlled Petrobras in partnership with the Anglo-Dutch company Shell, France s Total, and China s CNPC and CNOOC submitted an application for the auction. The Brazilian government requires Petrobras to maintain operatorship and a 30 percent stake in all pre-salt projects licensed after 2010, when a production sharing agreement regulation came into effect. The regulatory change has deterred many larger O&G producers from greater involvement in Brazil. Politics continues to dog Petrobras performance in the country. Brazil s generous subsidy scheme, for example, requires the company to sell imported oil domestically at a loss in order to temper consumer inflation. Petrobras development of pre-salt resources is also costly, requiring well over $100 billion, and the company is now the most indebted oil major in the world. According to press reports, Brazil also enforces among the most stringent LCRs in the world, extending to materials, equipment, systems and subsystems, and services. The intent of the law is to support local 2015 Oil and Gas Top Markets Report 13

16 employment, develop technology, and enhance competitiveness. Exploration phase activities require between 37 and 85 percent local goods and services, and development phase activities must use between 55 and 80 percent Brazilian content. In light of the LCRs, Petrobras has been vigorously pursuing foreign suppliers to either open plants in Brazil or partner with local manufacturers to source equipment for the O&G sector out of Brazil. Despite these constraints, there are now more deep water oil rigs, supply vessels, and floating production and storage units operating in Brazil than anywhere else in the world, according to research firm IHS. Brazil is also expected to need more than double the supply of existing shipping rigs, drilling platforms, and oil tankers, according to PWC research. As such, U.S. exporters will also find commercial opportunities in equipment supporting such machinery, including production pipelines alloy coatings, turbo compressors, polyester mooring cables, mooring systems, drilling pipelines, fiberglass pipelines, electrical cables, control systems, gravel packing, drilling bits, steam generators, and submarine valves, as well as support services. Recommendations for Export Strategies Brazil is in the high risk/high reward quadrant of the risk reward matrix and is a country with large U.S. market share. However, the strict local content requirements, specific labor requirements, and difficult customs process for imported O&G equipment remains a challenge to increased commercial exchange in the sector. U.S. export strategies should work within the existing import regulations established by the Brazilian government but anticipate that these regulations could change to encourage greater commercial exchange. The U.S. government had a number of pre-existing bilateral mechanisms in which to engage the Brazilian government, specifically, the Strategic Energy Dialogue, the Commercial Dialogue, and CEO Forum. These bilateral mechanisms are designed to address policy issues and integrate private sector policy positions on U.S.-Brazil commercial relations. U.S. companies already working in Brazil may consider working with the U.S. commercial service to get up-to-date information on these important bilateral dialogues that can impact import regulations Oil and Gas Top Markets Report 14

17 Canada Type: Large Market; Large Market Share Overall Rank: 1 Canada has the third largest oil reserves in the world, and is the largest supplier of crude oil and petroleum products to the United States. Ranked 5th in its O&G production globally, Canada is projected to have an 11 percent growth in its oil production by Canada also is the top recipient of U.S. O&G field equipment exports. This market is expected to grow for U.S. exporters as the Canadian government plans for more oil extraction from the Alberta tar sands and natural gas exploration in British Columbia. In 2013, the United States exported $2.2 billion of O&G field equipment to Canada. This represented 16 percent of U.S. O&G equipment exports, an increase of 6 percent from Much of that trade was in derrick parts and parts for boring and sinking machinery as well as casing. U.S. exports of related pipe were among the products with the highest export growth rates. Canada is a good export market for such products given its proximity and stable operating environment. Environmental control and efficiency products as well as high quality pipe similar to those used in the United States are likely to be particularly in demand in the coming years. Of Canada s top sources for O&G field equipment, the United States was consistently the largest source for more than 10 years, with market shares ranging from a low of 42 percent in 2009 to 52 percent in Other import sources for Canada were China, Japan, and Mexico, representing 10, 6 and 5 percent respectively in Canada imports a large share of its capital intensive O&G from the United States, for example, Canada imports 63 percent of its boring and sinking equipment parts from the United States. Between 2011 and 2035, the increase in demand for U.S. goods and services in Canada s oil sands is predicted to add an estimated $5.8 billion to U.S. GDP in 2015, $12.9 billion in 2020, $26.6 billion in 2025 and $42.6 billion in Over 1000 American companies are already involved in the supply chain to the oil sands projects. Canada has huge O&G field equipment needs to support its very large energy development plans. Canada wants to become an energy superpower in the next decade. Some estimates include over $600 billion in natural resource project investments in the next decade. Policy Context: Challenges and Opportunities Canada has the third largest oil reserves after Venezuela and Saudi Arabia, and it is the third largest natural gas producer. Canada s market is very transparent and stable, and the country s O&G sector will need much of the same equipment required in O&G fields as in the United States. Like the United States, Canada has both conventional and unconventional resource potential, but its oil sands, representing more than 85 percent of Canada s total oil reserves, are the focus of new oil development activities. The majority of Canada s oil sands are recoverable through in situ methods, although mining is also used. While oil sands are the focus, the Canadian parliament is evaluating new regulation limiting carbon emissions, which could place restrictions oil sands development. Although Canada is itself a leader in technology, equipment, procedures and personnel for the O&G industry, we assess that Canada will need a lot of new equipment in coming years. We foresee Canadian facilities needing new environmental control and energy efficient technologies as well as site reclamation products. Some existing equipment needs upgrading and the cost is estimated to be approximately $700 million per upgrade. U.S. manufacturers of drilling tools have done exceptionally well in Canada, as well as steel fabrication companies. Major O&G shows are very 2015 Oil and Gas Top Markets Report 15

18 well attended and have large delegations from the United States. U.S. firms that have attended Canadian O&G events report several millions of dollars in sales annually. In many areas, supply cannot meet demand in the industry in Canada; therefore there is a large market for U.S. manufacturers. There is also a need for building materials, coking and recovery units, instrumentation and control systems, safety and security equipment; pressure vessels, heat exchangers, and transportation equipment. There is a need for mobile mining equipment, including trucks and support gear (dozers, tires, excavators, shovels). In addition, ITA estimates that $1.1 billion per year will be spent on steel pipe tubing alone. Like the United States, Canada s O&G industry is completely privatized allowing company stakeholders interests drive investment. Only 19 percent of total world oil reserves are accessible for private sector investment 53 percent of which are found in Canada s oil sands. Licensing and regulatory rules differ by provinces and by energy source. With regard to oil exports, most Canadian oil is exported from western provinces, from which approximately 70 percent of the country's total exports are sent to refineries in the U.S. Midwest. Canada had originally planned to follow historical energy patterns wanting to build an extension of the Keystone pipeline to the United States through which it could export the majority of its heavy oil to existing refineries. That plan met with still unresolved resistance over economic, environmental and safety issues. The potential Canadian oil exports are large but are constrained by limited pipeline capacity especially outside of the North America. Once the export bottlenecks decrease and pipelines and LNG facilities are built, we believe Canada s production and exports of natural gas will grow quickly. directions. Canada is the only country to import U.S. crude oil, because of the restrictions on U.S. exports of crude; however, the United States exports more meaningful volumes of petroleum products to Canada. With the evolution and growth of U.S. oil and gas production, it lessens the likelihood that the United States will remain as heavily reliant on Canada for energy resources as it had in the past. Companies in Canada are looking to build pipelines west to export product to Asian markets with greater need for such imports and, in the long term, are seen as markets with more demand growth than the United States. The challenge will be coordinating both the support of the community and local governments. With the development of Canada s unconventional O&G resources, Canada will continue to rely on U.S. equipment and services. U.S. equipment and services suppliers have pioneered innovative tools for unconventional O&G development beyond shale, and oil sand production will rely on U.S. suppliers for the capital intensive equipment needed to develop these technically challenging resources. In particular, equipment for oil sands development will be needed to ensure a high degree of protection for local water resources, land reclamation, and reducing associated greenhouse gas emissions to ensure compliance with environmental regulations and protect local communities. Recommendations for Export Strategies Canada is characterized as a low risk/high reward market with significant U.S. market share. U.S. companies enjoy a number of advantages over other foreign competitors in Canada, such as the North American Free Trade Agreement, close proximity to the United States, and the many cultural and historical ties that exist between the United States and Canada. Export strategies should leverage the existing free trade agreement, cultural and business ties. Although the United States is a large net oil importer from Canada, the cross-border oil trade flows in both 2015 Oil and Gas Top Markets Report 16

19 China Type: Large Market; Small Market Share Overall Rank: 9 In 2013, global O&G equipment imports into China were valued at roughly $3.6 billion. Major new development areas in China s O&G sector are offshore and unconventional gas. China is seeking to increase the use of natural gas for power production and industrial usage, focusing gas development policies on unconventional resources such as coal-bed methane and shale gas. Despite the government s political directives, regulatory uncertainty and uncompetitive policies limit foreign participation. In 2013, the United States exported $670 million of O&G field equipment to China, our third largest trading partner and representing about 5 percent of our Chinabound U.S. exports that year. Currently, top U.S. O&G equipment exports are parts for derricks and for sinking and boring machinery, which represent 28 and 53 percent of O&G exports to China, respectively. Of O&G field equipment it imports, China ranked as the tenth largest market in 2013, valued at roughly $3.6 billion. Chinese imports of these products grew about 10 percent from 2012 but totals remain lower in absolute terms than the $5 billion imported in Over 70 percent of the 2013 imports were parts for derricks and sinking and boring equipment. China s top three trading partners in this segment were Korea, Japan, and the United States. Policy Context: Challenges and Opportunities China is the largest energy consumer and producer in the world, and its fast-growing economy places energy issues among Chinese policymakers top concerns. As China pushes to meet its energy demand, the environmental costs of energy consumption such as pollution from coal-power generation and transportation have also accelerated China s search for new and cleaner forms of energy, particularly natural gas. In this respect, Beijing has announced ambitious targets for natural gas, stating this energy source must supply 8 percent of all energy demand by 2015 and 10 percent of demand by In 2012, natural gas supplied 3 percent of China s power production. In addition to building LNG import and pipeline infrastructure, Beijing is pushing to increase domestic natural gas production. Shale resource development is targeted for development because of its abundance and its success in the United States. According to US Energy Information Administration, China's technically recoverable shale gas reserves are 1,115 Tcf, the largest shale gas reserves in the world. China lags, however, in expertise and technology to develop these resources, and the government is incentivizing producers to increase investment and production. China s complex geology, however, means drilling is expensive, often over twice as expensive as in the United States. The business environment for oil and gas development in China is challenging, particularly for foreign companies. Foreign participation in the China s shale initiative has been limited and state dominance, lack of competition, and uncertain regulations continue to frustrate international companies efforts. Many winners of past bid rounds were domestic firms with little experience developing shale resources, which possibly opens avenues of cooperation for foreign oilfield service providers. However, regulations restrict competition and foreign participation. Nonetheless, ample subsidies, legal reform, and productivity targets are among the reasons production is expected to grow in the short-term with significant increases in the 2020s. Companies that specialize in drilling, extraction 2015 Oil and Gas Top Markets Report 17

20 equipment, pipeline construction or provide operational services for shale gas developers may benefit from the growth of the Chinese shale gas market. In addition, companies with expertise in deep extraction and water efficiency will also be well positioned as the market expands. Deep-water resources, too, have a prominent place in Beijing s upstream growth strategy. More than half of the oil fields that provide about 80 percent of China s oil production are declining, and the country increasingly depends on imported O&G. To help reverse these declines, Beijing supports investments in technologies such as enhanced oil recovery and encourages the search for new supply through deepwater exploration. In particular, China s National Energy Administration (NEA) has stated that the South China Sea would 'form the main part' of the country s offshore exploration under the current five year plan. As a result, the domestic offshore support market is developing fast to cater to the needs of the Chinese offshore O&G industry. International Oil Companies (IOCs) and service companies have established their presence in China chiefly through partnerships with Chinese companies. In offshore development, IOCs mostly partner with state-owned CNOOC, while China s three largest stateowned firms for both onshore and offshore projects, which often involves complicated drillings, hire service companies. Offshore participation, however, carries risks because of China s expansive territorial claims. While some of China s offshore activity falls within recognized boundaries, conflicting claims with Indonesia, Japan, Malaysia, the Philippines, and Vietnam add operational uncertainty to future East and South China Sea exploration and production. Recommendations for Export Strategies China s is positioned in the high risk/high reward quadrant of the risk reward analysis and is also characterized as having small U.S. market share. There are a number of risks that U.S. O&G equipment and service suppliers face, specifically violations of intellectual property rights. U.S. companies are reluctant to bring their most advanced equipment to China, which has ramifications to increased development in China s O&G sector, most notably in unconventional and deepwater oil and gas extraction Oil and Gas Top Markets Report 18

21 Colombia Type: Large Market; Small Market Share Oil remains Colombia s top export product and boosting O&G production and exports are priorities for the Government of Colombia. Regulatory reforms were enacted as an incentive for foreign investment from international companies in unconventional exploration and development. Commercial-level production in Colombia s deepwater is untested, but has garnered interest from major international O&G companies. More capital-intensive equipment is needed to address the technical challenges associated with such unconventional production, and the significant environmental and safety concerns associated with deepwater offshore exploration. However, rule of law, corruption, weak infrastructure, and groups opposed to building up the oil industry represent significant concerns for increased U.S. exports. Overall Rank: 2 Colombia is the United States eleventh largest market for O&G equipment exports with about $339 million exports in This is a decrease from the 2010 high of $631 million, and even the 2011 and 2012 levels of $459 million and $453 million, respectively. The largest portion of these exports was parts for boring and sinking equipment and attachments for derricks followed by high quality pipes. By 2017, these exports could be above $750 million if current trends continue. The United States is Colombia s largest source of imports, providing consistently over 30 percent of its equipment. China is the second largest supplier with 17.3 percent in 2013 followed by Mexico, which supplied almost 13 percent in Imports from the United States and China declined about 30 percent between 2012 and 2013 while those from Mexico fell by only hour percent and increased as a share of the total imports. Imports from both China and Mexico were mostly concentrated in pipes. Policy Context: Challenges and Opportunities Colombia has an attractive fiscal regime, contract terms and regulatory environment for O&G investors, which helped it grow its production by more than 70 percent since the mid-2000s. As of 2013, production was above one million barrels of oil per day and by 2018 may reach 1.3 million barrels of oil per day. However, in recent months output fell for the first time since 2005 due to security issues and damage to the pipelines. Future success in the oil industry is contingent on security and shifting the exploration focus away from conventional oil sites, where finds recently had been slowing, to offshore and unconventional sources. Colombia is working hard to provide a stable environment for success in this industry. In 2003, the government created the National Hydrocarbons Agency (ANH) to administer the hydrocarbons resources. This administrative change allowed Ecopetrol, Colombia s national oil company, the ability to compete on equal footing with other oil companies in bidding for exploration and production blocks (block rounds coordinated by ANH). Both Ecopetrol and ANH report to the Ministry of Energy and Mines (MEM). Ecopetrol plays both roles as resource administrator and state oil company. Consequently IOCs were reluctant to partner with Ecopetrol, because there was the perception that Ecopetrol retained the best areas. With the change, companies like Anadarko and Statoil have become partners with Ecopetrol in Colombia, Gulf of Mexico, Brazil, Peru, among other countries. While the new organization has been successful in 2015 Oil and Gas Top Markets Report 19