China, the world’s most populous country, became the world’s largest energy producer in 2009, the largest energy consumer in 2011, and the largest net oil importer in 2014. One factor that has bolstered China’s influence in the global energy market is its emergence as a major player in manufacturing and exporting low-cost, high quality drilling equipment.
When I started my work 15 years ago, China was a very different market in the upstream division (exploration and production) of oil and gas. Because major oil-producing countries exclusively purchased equipment with American and European standards, China was barred access to the international market. These standard requirements, at the time, could simply not be met by Chinese companies.
At the same time, countries like Iran were experiencing gaps in the industry after regional warfare disrupted their oil and gas sector. After the Iranian revolution in 1979, oil and gas experts couldn’t recognize the needs of the industry and external constraints prevented expansion. Instead of purchasing equipment, Iran would rent, having no standard for ordering equipment. This weakness was left unconsidered and unresolved for decades.
As an Iranian professional in the oil and gas industry, it was my mission to standardize financing and leasing methods for countries like Iran, and create a road map to resolve these crippling issues.
After recognizing the many unsatisfied needs of the Iranian market, my company started working to address them. At the same time, we evaluated the weakness of the Chinese market in the upstream division of oil and gas. As it turned out, the solution came in linking these subjects together.
First, we helped Chinese manufacturers produce equipment based on European and American standards. This was a huge unmet need of Iran’s market at the time, and Chinese companies had very limited experience with production and the exportation of oil and gas equipment. Still at the early stages of adopting international stages, their activities were limited to China’s domestic market and several other countries.
Helping China shift focus from importation to production was a breakthrough for them as much as it was for their buyers. Costs decreased, and massive job creation led to economic growth. Joint ventures with American companies allowed Chinese manufacturers the benefit of Western technology combined with low labor costs. The record of production for Chinese companies in exportation now exceeds 1,000 rigs; Chinese yards are now building more jack-up rigs than all other yards in the world put together.
At first, many traditional countries around the Persian Gulf were skeptical about using Chinese equipment, but China built trust in the market by offering high-quality products comparable to American and European equipment, but at a much lower price. Products made in China with American quality were introduced in Saudi Arabia, Russia, Iran, Africa, Kuwait and Venezuela, which began to order from Chinese manufacturers in the upstream division.
This increased the sale in upstream along with downstream (refinement, distribution, etc), as the same Chinese manufacturers once struggling in the market started to produce more. Due to the increase in operating activities my business created, the number of Chinese manufacturers increased tremendously. China created joint ventures with American companies, making them one of the biggest producers of equipment in the upstream division in offshore and onshore equipment.
The boom in China’s economy was helped by the many factories and jobs created to produce equipment and sub-equipment. These factories flourished thanks to China’s major economic strengths: hard working citizens, strong infrastructure and consistent methodology. One cause for concern, however, has been China’s low level of consumerism, which accounts for just 28 percent of its GDP (as opposed to the U.S. 76 percent). Lengthening vacation time was one policy introduced to remedy this.
Encouraging spending has helped the economy grow even more, and experts surmise that consumer spending could reach $67 trillion over the next decade if shopping sees a greater boom. Energy consumption has grown even faster than consumerism: In 2014, China’s oil consumption growth accounted for about 43 percent of the world’s oil consumption growth, more than one-third of the global demand.
A lot has changed in the past 15 years in China, the Middle East, United States and across the globe. The competition for market share of oil and gas equipment, which used to be between American and European companies, has shifted to competition between Chinese companies in the last five years. I contribute this success to the reverse engineering method adopted by Chinese manufacturers.
Today, China is highly invested in research and development to help create more jobs and technology in an upstream market. These investments supported China’s subsequent rise to the second largest manufacturer and exporter of oil and gas equipment and services in the onshore and offshore division. China ranked as the second greatest supplier of oil to their domestic market, a trend expected to continue up until 2025, improving both the country’s GDP and its oil consumption. Because growing demand for oil outpaces their domestic production, China is also building strategic oil reserves to ensure supply remains stable.
China is also the world’s greatest carbon emitter, so the nation has set into motion ambitious plans to diversify their energy sector with renewable energy sources like solar and wind. But as the population continues to climb, it’s unlikely this will hinder oil and gas industry’s significance. We can likely expect the mutually beneficial relationship between Chinese manufacturers, oil-producing nations and suppliers to remain strong, steady and lucrative.
Featured image: Asian Development Bank via Flickr.