Oil and Gas Equipment and Services Industry Report — October 2006

1. Introduction
2. 2005 OGES Principal Statistics
3. Industry Characteristics
4. Research and Development
5. Offshore Activities
6. International Trade
7. Summary

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1. Introduction

This report summarizes the results from the 2005 "Oil and Gas Equipment and Services (OGES) Survey" conducted by Goss Gilroy Inc. for the Resource Processing Industries Branch (RPIB) of Industry Canada. It covers the following topics: revenues, employment, geographic concentration, research and development (R&D) activities, the offshore market, international trade, domestic and foreign establishments, and emerging competition.

Domestic manufacturing revenues in 2005 amounted to $13.875 billion, while service revenues were $55.506 billion. Contract drilling revenues in 2004 amounted to $11.330 billion.

The industry employs a significant number of people with 47 000 employed in manufacturing, 120 000 in services and another 52 000 in contract drilling.

Alberta is the primary concentration for all three sub-sectors of the industry, with about 78 percent of business coming from that province.

Manufacturers with revenues over $100 million engaged primarily in the manufacturing of drilling equipment. Service firms of the same size engaged primarily in engineering and geomatics services.

All three sub-sectors expect near or greater than double digit growth in the coming years. Manufacturers are expecting growth at nine percent, while services and contract drillers are expecting growth at about 12.7 percent.

The top three export markets for manufacturing and services are the same, with the United States ranked first, the United Kingdom second and Russia third. Contract drillers focused primarily on domestic operations.

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2. 2005 OGES Principal Statistics¹

Table 1: Oil and Gas Equipment and Services Survey Principal Statistics

	Domestic Revenue ($ millions)	Domestic Employment	Geographic Concentration	Primary Activity2	Expected Annual Growth (percent)	Top 3 Export Markets
Manufacturing	13 875	47 623	Alberta (79%)	Drilling Equipment (83.3%)	9.0	1) United States 2) United Kingdom 3) Russia
Services	55 506	120 014	Alberta (75%)	Engineering/ Geomatics (78.6%)	12.6	1) United States 2) United Kingdom 3) Russia
Contract Drilling3	11 330 (2004)	52 537	Alberta (80%)	Number of rigs: 739	12.8

Relative comparison statistics, between 2000 and 2005, show that the industry has experienced significant growth over the period. Total industry revenues (manufacturing and services) have more than tripled as a share of GDP, from 1.41 percent to 5.9 percent. Industry employment as a share of total economy employment has doubled since 2000, from 6.2 percent to 13.6 percent. These increases highlight the importance and large effect that the oil and gas manufacturing and services industry is having on the Canadian economy.

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3. Industry Characteristics

3.1 Revenues

In 2005, domestic revenues for the OGES industry are $69.3 billion; services account for $55.5 billion, and manufacturing, $13.8 billion. Exports and foreign production generate another $55 billion in revenues, for a total of $124.3 billion in global industry revenues.

Graph 1: Service Revenue Shares

Graph 2: Manufacturing Revenue Shares

In terms of regional distribution of domestic revenues, Alberta has the largest shares of services and manufacturing revenues. Graphs 1 and 2 show that the percentage of manufacturing revenue is higher than the service revenue in Alberta; this confirms the finding that Alberta has a higher share of manufacturing than services firms.

Survey participants expect revenues to continue growing at a fast pace. For those in services, the expected average growth rate is 12.6 percent annually over the next three years while the manufacturers estimate a growth rate of 9.0 percent per year.

Table 2 shows the percentages of revenue classes participating in Resource Processing Industries Branch (RPIB) defined sub-sectors for both the oil and gas services and manufacturing industries in Canada. Service companies with revenues below $1 million concentrate their businesses on Other Services whereas no manufacturers in this class engage in oil sands equipment. Based on the sums of the revenue columns, the larger firms tend to participate in a greater number of sub-sectors. Services companies with revenues greater than $100 million focus their business on Engineering and Geomatics while manufacturers in the same revenue class focus on Drilling Equipment.

Table 2: percentage of Revenue Class Participating in Sub-sectors⁴

Sub-sector	Up to $1 Million	$1 Million – $20 Million	$20 million – $100 million	$100 Million +
Services
Contract Drilling	14.3	6.7	16.7	35.7
Pipeline Services	42.9	30.0	11.1	60.0
Transportation5	14.3	23.3	5.6	30.0
Engineering and/or Geomatics	28.6	40.0	44.4	78.6
Other Services	55.6	45.7	63.2	55.0
Unspecified Services	28.6	56.7	55.6	77.8
Manufacturers
Drilling Equipment	50.0	25.0	27.3	83.3
Drilling Consumables	50.0	16.7	36.4	20.0
Pipeline Equipment	50.0	33.3	9.1	57.1
Oil Sands Equipment	0	16.7	54.5	40.0
Unspecified Equipment	0	58.3	27.3	62.5

It is worth noting that the percentages of Unspecified Services and Unspecified Equipment in each revenue class are very high, indicating many companies are doing business in other areas in addition to the traditional OGES business. The following list summarizes the type of businesses included in the unspecified categories.

Service companies identified as unspecified include the following: 

• Shore-base support services, cranes, offshore cargo carrying containers; warehousing, open storage;
• Environmental Consulting;
• Information and Communication Technology (ICT);
• Trade services such as cranes, shore to vessel radio services, scaffolding and deck hands;
• Training services;
• Power generation — actual and back-up;
• Equipment rentals;
• Monitoring of hydrocarbon flows; and
• Camps.

Manufacturers that were identified as unspecified include the following: 

• Electrical instrumentation;
• Other flow monitors and control devices including heat exchangers;
• Core repositories for storage of petroleum (and gas);
• Shipbuilding — offshore rigs, decks, and service vessels; and,
• Telecommunications hardware.

3.2 Employment

Global industry employment⁶ by Canadian firms reached 240 000. Domestic levels of employment were 168 000 in total, with 48 000 in manufacturing and 120 000 in services.

Table 3: Firm Size Employment

Employment Threshold (No. of persons)	Percentage	Cumulative percentage
4	10.2	10.2
9	0	10.2
19	10.2	20.4
49	12.3	32.7
199	34.6	67.3
499	6.2	73.5
999	4.1	77.6
1 499	4	81.6
2 499	2.1	83.7
5 000	6.1	89.8
Over 5 000	10.2	100

In terms of employment by firm sizes, approximately one-third (34.6 percent) of firms employed between 50 and 199 personnel; in second place is 20 to 49 personnel (12.3 percent) followed by ties between 1-4, 10 to 19 and 5 000 or more employees at 10.2 percent each.

The employment of small and medium-sized enterprises (SMEs) accounted for more than 67.3 percent of all OGES firms in 2005.⁷

Employment by region in both services and manufacturing is heavily weighted in Alberta (94 percent and 98 percent respectively), while all other provinces have less than 3 percent of the share.

3.3 Geographic Distribution

As shown in Graph 3, a large majority of firms in the industry are located in Alberta (68 percent), with the second largest area in the Maritime Provinces (12 percent), and Central Canada (9 percent) coming in third. The other regions accounted for the remaining 11 percent of established oil and gas equipment and services companies in Canada. In Graph 4, Alberta is also shown to be the key market for most OGES companies.

Graph 3: Established Firms by Region

Graph 4: Key Markets

If the Resource Processing Industries Branch list of oil and gas equipment and services companies is broken down into manufacturing and services by region, then Graph 5 shows that Alberta has a slightly higher percentage of manufacturing than services companies. The results reflect the common expectation that manufacturers prefer to locate in proximity to their clients in the oil and gas industry. Unlike manufacturing firms, services firms, in principle, could do businesses anywhere with their mobile labour.

Graph 5: Location by Primary Activity

3.4 Establishments and Foreign Operations

3.4.1 Domestic Establishments

The survey indicates that services industries (including all sub-sectors) were more likely to have multiple sales offices than those in the manufacturing industries. Furthermore, with the exception of the drilling equipment manufacturing sub-sector, service industries had a greater number of twelve or more domestic sales offices than does the manufacturing industries.

Most firms (62.2 percent) are comprised of single offices located in Canada. There were 9.2 percent of firms with two offices and 9.1 percent of firms with twelve or more sales offices. The remaining 19.4 percent of firms fit into the 3 to 11 offices range.

3.4.2 Foreign Operations

The survey indicates that service industries (including all sub-sectors) were more likely to have foreign sales offices than did those in manufacturing industries. Nearly one-fifth (19.0 percent) of Engineering and Geomatics companies in the service industries have twelve or more foreign operations. Drilling equipment was the only manufacturing sub-sector with more than twelve foreign sales offices.

Approximately 65 percent of the firms had at least one sales office abroad, in which 38.3 percent responded that they had one international sales office, 14.8 percent having between 2-11 sales offices, and 11.7 percent having twelve or more offices.

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4. Research and Development (R&D) Activities

Manufacturing firms are more likely to engage in R&D activities, with the exceptions of Engineering and Geometrics and environmental consulting. A majority of other services such as equipment rentals and training are unlikely to require R&D activities

In regards to R&D, more than half of the firms (52.6 percent) spend between one and five percent of their revenues on R&D activities. However, another large percentage of firms, 28.9 percent, does not contribute to R&D activities at all.

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5. Offshore Activities

Canadian companies are participating in a wide geographical array of offshore markets, amongst others, Canadian interests range from offshore Canada to the North Sea, the Gulf of Mexico, Yemen and offshore China. In general, 60 percent of respondents had some degree of their revenues coming from the offshore markets.

Nearly one-fifth (18 percent) of manufacturers relied on the offshore markets for more than 75 percent of their revenues while only 14 percent of service providers were that reliant. Offshore drilling was a fairly substantial activity, 24 percent of respondents earn more than half of their revenues from the offshore markets. Two services in particular were especially reliant on offshore markets, 19 percent of Engineering and Geomatics firms and 24 percent of other services rely on this market for more than 75 percent of their revenues.

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6. International Trade

6.1 Exports

A majority of firms, 77 percent of manufacturers and 72 percent of service providers, receive less than 25 percent of their revenues from exports. This implies that a large majority of companies focus on the Canadian domestic market. Those that do export typically head first to the United States market, second to Russia and third to the United Kingdom. Smaller portions of the firms also receive export revenues from other areas like Australia, the Middle East, China, Asia, and South America.

6.2 Imports

In 2005, 61 percent of firms imported equipments at a value range of $0 to $500 000. Another 20 percent of the respondents imported within the range of $5 to $100 million, and accounting for all imports, the total value was estimated at $1.7 billion.

6.3 Competitive Pressures

For most firms, North America, Europe and other Asian countries, excluding China, are considered to be the current sources of major competition. However, other Asian countries, and in particular China, are viewed as emerging sources of competition.

Graph 6: Major Sources of Competition

When broken down by sub-sector, firms believe that North America will be a major source of competition in the future for all equipment and services. Outside of North America, contract drilling ranked first as the most competitive sector in Central and South America, Europe, Asian countries excluding China, Australia and New Zealand. In second place is the pipeline equipment sector in Central and South America and Asian countries excluding China; finally, oil sands equipment from Asia, including China, ranks as third in competitiveness. In terms of overall competitiveness, respondents were concerned about future competitions from China in the pipeline services and drilling consumables sectors while major concerns for the drilling equipment sector will come from Central and South America.

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7. Summary

The oil and gas equipment manufacturers and service providers are currently experiencing a period of heightened growth and prosperity. Revenue and employment have both increased modestly.

However, the industry is not without its problems, competition is expected to increase significantly from areas like China and other Asian countries; and in addition, finding and retaining skilled labour is becoming increasingly difficult.

The oil and gas equipment and services sector is not expected to slow down in the foreseeable future. The high demand for the industry's products is likely to continue for a significant period of time giving Canadian firms unprecedented growth and business opportunities.

Appendix: Methodology

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¹ Please note that the following figures are not directly comparable to previous studies due to methodology changes. return
²These figures show the primary activity of firms with revenues greater than $100 million. return
³ For contract drilling methodology, please see appendix. return
⁴ Note that the percentages do not sum up to 100, as companies are involved in more than one sub-sector. return
⁵ Does not include pipeline transportation. return
⁶ Global industry employment is an estimate of the number of people employed by Canadian companies domestically and abroad. return
⁷ According to Statistics Canada, small firms are defined as having fewer than 50 employees, medium-sized as having between 50 and 249 employees, and large as having more than 250 employees. return