Industry Environment Analysis

The industry analysis will analyze the environment within the offshore oil

industry in China. Due to the complex structure of the Chinese oil industry, some of the forces will be somewhat overlapping. .

9.2.1 Rivalry among existing competitors 

Through COSL and CNOOC ltd, CNOOC is the dominating owner and provider of oil platforms in the Chinese offshore market. This creates a market with a low degree of competitiveness, where CNOOC ltd and COSL gain first priority to operations as long as they are able to provide the required products.

The market situation in the deep-sea market is though more fragmented. As CNOOC ltd and COSL lack the necessary technology, this market has a higher concentration of providers of platforms. The deep-sea FPSO market is covered through JVs with international oil companies, with FPSOs partially owned by CNOOC. As all platforms within the oil market is owned by oil companies, there is currently no market for FPSO contractors.

The Norwegian company Sea Drill has the only deep-sea drilling platform present in the Chinese deep-sea driller market. Sea Drill’s driller Hercules West has been operating for Husky/CNOOC in the South China Sea since 2008. Since all platforms are locked to operating contracts, rivalry within this market is limited.

This situation is though predicted to slowly change, as both CNOOC Ltd and COSL are gaining more deep-sea technology, thus the need for international actors with desired technology decreases.

The market rivalry is low, simply because the structure of the industry creates no incentive for rivalry.

Even though there is a low degree of rivalry between the companies present in the Chinese market, this would not be the situation regarding the international market, with competitors aiming to enter the Chinese market. As it is outside the scope of this thesis, an evaluation of the international industry rivalry will not be

addressed. It will though be mentioned that the rivalry seems to be smaller at the deep-sea driller market than the FPSO market, as the global demand for deep-sea drillers is larger than the units available, as of today.

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9.2.2 Customers Bargaining Power 

There is only one potential customer in the deep-sea oil industry; CNOOC. With the rights to all offshore areas deeper than 5m on Chinese Soil, and the majority stockholder in all JVs with international oil companies, all agreements in the Chinese offshore oil industry have to be conducted or approved by CNOOC. In addition, any provider of FPSOs or drillers would only account for a small proportion of CNOOC`s annual revenue. Together, these two factors are increasing CNOOCs bargaining power.

Decreasing CNOOCs bargaining power is their need for deep-sea technology. For Sevan, being able to provide scarce technology and differentiating themselves from the competitors will be the best way to attain an attractive deal in the Chinese offshore oil market.

Even though CNOOC is the only customer for both FPSOs and drillers, the customers bargaining power is different within these industries based upon the need for advanced technology. CNOOC`s bargaining power is extremely high regarding all shallow water operations, where they already have the necessary technical expertise. It will therefore be difficult for Sevan to acquire an attractive contract in the shallow-sea market. CNOOCs bargaining power will also be strong in the deep-sea FPSO market, where their technology is rapidly improving. In contrast, the need for contractors with deep-sea drilling experience is high, and there is a lack of available drillers in the world market. This will reduce CNOOCs bargaining power within the drilling industry, and it is therefore more likely that Sevan can reach a mutually beneficial agreement with CNOOC, regarding a deep-sea driller unit.

9.2.3 Suppliers Bargaining Power 

Today, Sevan is building their rigs at COSCO shipyards in Nantong and Qidong.

The cooperation has been well functioning and has required specific investments from both parties. COSCO is the largest shipbuilder in China, and together with CNOOC subsidiary COOEC, they are the only Chinese companies specializing in rig building. The relationship between COSCO and Sevan is also viewed as very important by COSCO, since it is providing COSCO with rig building competence.

Due to COSCOs proven ability to construct advanced rigs, CNOOC has shown

Page | 65   interest in using COSCO shipyards for rig construction. If Sevan was to enter the Chinese market, the good relationship with COSCO would be an important factor for obtaining an attractive deal with CNOOC.

As the situation is today, the bargaining power of the supplier is fairly low. Sevan could, if necessary, use well-established shipyards with higher rig building experience, in countries such as Korea or Singapore. But if Sevan wishes to enter the Chinese deep-sea offshore market, the bargaining power of COSCO would most likely increase, as the relationship with COSCO will positively influence Sevan’s reputation in the Chinese market.

9.2.4 Threat of New Entrants  

The entry barriers in the Chinese offshore oil market is heavily influenced by one factor; government policy. And through the state-owned company CNOOC, the government policies are applied into the offshore industry. Therefore, if a company wants to enter this industry, it also has to be beneficial for China as a country. This makes the entry barriers for the Chinese market very high.

CNOOC’s goal is to acquire enough competence to enter the deep-sea offshore market themselves without JVs with international companies. When dividing the South China Sea blocks, CNOOC has set aside 70% of the blocks for their own operations. In this sense, CNOOC as an independent company could be

categorized as a new entrant in the deep-sea offshore market, in addition to new international entrants.

CNOOC will operate 70% of the South China Sea themselves, but still lack technology and expertise within this sector. Therefore, the possibility for CNOOC using contractors, in order to operate their deep-sea fields successfully, increases.

This opens market entry opportunities for offshore contractors, with high technological expertise. For Sevan Marine, creates an opportunity to enter the Chinese deep-sea offshore market.

9.2.5 Threat of Substitute Products 

Today, it exist no substitute for drilling rigs, and the only substitute for FPSOs are pipelines. As both pipelines and FPSOs are major investments, and FPSOs usually

Page | 66   are used in areas where it is difficult to lay a pipeline system, or where the

expenses will be too large, the threat of substitutes are very low.