Sweco vibrating screen manual pdf

STRATEGIC MANAGEMENT

1. Use Porter's Model of the Five Forces of Competition to assess SWECO's ability to compete in the oil drilling industry. Go through each of the five forces and explain how they present opportunities and/or problems for SWECO based upon specific information from the case.

2. Use Porter's Model of the Five Forces of Competition to describe how Apple, Inc. sought to establish and maintain a competitive position in the consumer electronics industry. Which of the five forces was most important to Apple's approach? Use information from the case to support your argument.

George S. Yip, DBA candidate, prepared this case under the supervision of Associate Professor Michael E. Porter as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. The case is based in part on a report by Richard O. Adams, Craig A. Jensen, Eugene P. Nesbeda, and Steven R. Wilson, all MBA 1979. Some financial and market data are disguised.

Copyright © 1980 by the President and Fellows of Harvard College. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means without the permission of Harvard Business School. Distributed by the Publishing Division, Harvard Business School, Boston, MA 02163. (617) 495-6117. Printed in the U.S.A.

1

SWECO, Inc. (A)

Well, we've done it. You and I know the process works and the equipment works, but it won't be easy to convince the old-timers who have drilled all their lives without it. That includes the people in my own company.

With these words in November 1972 Dr. Peter Hamilton, of the production research department of a leading international oil company, encouraged Les Hansen, of SWECO, to enter the oil field equipment industry with a new piece of oil well drilling equipment that SWECO had developed, partly at Hamilton's instigation. SWECO called the new product a sand separator, though it was known in the industry as a mud cleaner.

SWECO, Inc.

SWECO was founded in 1917 as the Southwestern Engineering Corporation. During the 1930s Southwestern went bankrupt, and the Miller family, owners of some of the stock, assumed management control of the company to protect their position. Under new leadership, SWECO began to concentrate on the manufacture of heat exchangers and the engineering and construction of refineries and other process plants. The latter proved to be a highly competitive, and therefore not very profitable, field.

In 1947 an event occurred that would completely change the nature of SWECO's business, an event described by Howard Wright, Jr., SWECO's president, as the most important in the company's history. This was the acquisition of the so-called Meinzer Motion patent, a technique for inducing vibration in process equipment in three dimensions rather than two. This patent provided the basis for SWECO to enter production of vibratory machines for use in industrial screening, finishing, and grinding processes. In 1972 nearly all of SWECO's business came from the manufacture of vibratory equipment based on the Meinzer Motion principle. SWECO had sold off its last nonvibratory business in 1969, a sale that had reduced the company to one-third of its previous size. Looking back, however, all SWECO executives thought that the sale had been an excellent decision.

Business Areas

In 1972 SWECO's revenues of just under $15 million came from three divisions: Process Equipment, Finishing Equipment, and Environmental Systems. Foreign sales accounted for approximately 15% of total sales. (See Exhibits 1 and 2 for SWECO's financial statements.)

For the exclusive use of S. Sayeste, 2018.

This document is authorized for use only by Sibiya Sayeste in Strategic Managment taught by Fairweather, Peter, SUNY - New Paltz from January 2018 to May 2018.

380-167 SWECO, Inc. (A)

2

Process Equipment Division. Process Equipment accounted for over 50% of revenues and was SWECO's oldest division. It had two major product lines. The first and more important was the Vibro-Energy separator, which screened solid particles from liquids or other solid particles. SWECO supplied separators to firms in many industries throughout the world. More than 15,000 SWECO separators were in use in 1972 in such industries as chemicals, food, ceramics, and pulp and paper. Some of the materials screened were cereals, detergents, sugar, clay, fertilizer, sand and gravel, salts, plastic pellets, wood chips, soybeans, paint, and apple juice.

SWECO separators were vibratory screening devices with from one to four decks (layers) of screens of varying mesh. The material to be screened was fed to the top layer. As vibration forced the material to the edge of the screen, the smaller particles or liquids passed through the mesh and the larger particles were funneled off from the periphery. Further passes through lower, finer screens removed increasingly smaller particles.

A vibratory separation machine consisted of a large metal cylinder, with layers of screen cloth inside, and spouts for inflow and outflow of materials. Units ranged up to 6 feet in diameter and were built with a variety of special configurations and custom features. In addition to selling separators, SWECO sold replacement screens and spare parts. These items were a continuing and profitable source of follow-on business. In 1972 SWECO separators ranged in price from $1,000 to $10,000; replacement screens sold for between $50 and $400 apiece.

The second product line in the Process Equipment Division was the Vibro-Energy grinding mill, used to reduce the size of wet or dry particles. A grinding mill was loaded with the material to be ground, together with a special grinding media (e.g., cyclindrical aluminum pellets). The combination was vibrated at a high frequency, producing a grinding action. Applications for the grinding mill included the processing of ceramics, pharmaceuticals, cosmetics, paints, foods, electronic memory cores, powdered metals, and pesticides.

Finishing Equipment Division. This division manufactured Vibro-Energy finishing mills, which deburred or polished metal parts by vibrating them with an abrasive compound. Customers for this equipment were diverse metalworking industries.

Environmental Systems Division. This division manufactured a centrifugal wastewater concentrator that used a fine-mesh centrifugal screening process to purify liquids. The concentrator was used in municipal applications for removing a high percentage of solids from raw sewage. It was also used in industrial processing plants, such as in paper, textiles, meatpacking, food canning, and poultry, where the concentrator could recover large amounts of usable material while cleaning up plant effluent.

Product Technology

The three-dimensional Meinzer process used in SWECO's products gave them several advantages over conventional vibratory products. The additional dimension of movement increased the number of ways in which the materials undergoing separation could be shaken and increased the force that could be exerted. This greatly improved the control of the separation process, its capacity to discriminate among different particles, and the rate of throughput. Second, the three-dimensional vibrating movement allowed the use of round rather than rectangular screens. This led to two advantages. A round screen made it possible to use an entire screening surface without having to worry about material becoming trapped in corners. Also, the screens could be mounted much more efficiently. A key feature of an efficient screen was that it be taut and even to prevent materials from concentrating at uneven spots. With rectangular screens, the mounting points on the framing rim exerted uneven pressures on the screen cloth. The mounting points for a round screen, in contrast, exerted exactly even pressures. The greater resulting tautness and freedom from irregularities increased both the screening efficiency and the life of a round screen.

For the exclusive use of S. Sayeste, 2018.

This document is authorized for use only by Sibiya Sayeste in Strategic Managment taught by Fairweather, Peter, SUNY - New Paltz from January 2018 to May 2018.

SWECO, Inc. (A) 380-167

3

SWECO had also developed a patented, self-cleaning device for its screens. A major problem in screening was that after some period of operation parts of a screen would clog up with materials, an effect known as blinding. SWECO's self-cleaning device minimized this problem.

SWECO separators combined three-dimensional motion, round screens, and the self-cleaning device to produce a machine with great advantages over competitors' rectangular screens. For example, 3 square feet of a SWECO screen were more efficient than 6 square feet of rectangular screen.

SWECO operated only in the fine segment of the screening business, and was not usually cost-effective in screening particles larger than 1/2 inch. Most of SWECO's production was of screens with 80 mesh or finer. An 80-mesh screen had 80 openings per linear inch (6,400 openings per square inch). Large-screen (coarse-mesh) separators were based on a totally different applications technology. The larger screens were also incorporated in relatively low-value-added equipment, and there were many qualified competitors in this market.

About a dozen other fine-screen manufacturers competed with SWECO. Because of SWECO's many technological advantages, these competitors tended to supply separators and screens for less demanding uses. SWECO had maintained its technological lead, even though the Meinzer Motion patent had expired in 1959. To do so SWECO spent heavily on research and development, with an annual product development budget of about 2% of sales. Spending was even heavier on applications engineering to find new uses for the company's equipment.

SWECO estimated that in 1972 it held a 50% share of the U.S. market for fine screens. Its three major competitors, all small independent companies (Kason, Midwestern, and Derrick), had combined 1972 sales of $6 million to $7 million. Kason and Midwestern had been started by ex- SWECO sales representatives and also used round screens. SWECO did not consider their equipment to be as high quality. Derrick competed with a special rectangular fine-screen design. There were also about 10 major competitors, whose influence was primarily in the highly profitable replacement- screen business, where they competed with low-cost, regional strategies.

Roughly one-third of SWECO's revenues came from the sale of complete units (separators, finishing mills, etc.). Total unit sales in 1972 were approximately 1,000 units, at an average price of $5,000 each. The balance of revenues came from replacement parts and screens.

Operations

In 1972 SWECO had about 325 employees, the majority located at City of Commerce, California, near Los Angeles. Most of SWECO's manufacturing was done at the Los Angeles plant, which had 100,000 square feet of space and an average daily output of three units. Production was essentially a batch process. SWECO also had assembly plants in Toledo, Ohio; Marietta, Georgia; Little Ferry, New Jersey; Cincinnati, Ohio; Toronto, Canada; and Nivelles, Belgium. In addition SWECO had subsidiaries in Germany and Italy, and was in the process of setting up others in Spain and Mexico. The company was also constructing an 80,000-square-foot plant in Florence, Kentucky. Manufacturing employees totaled about 200.

Manufacture of a separator unit comprised the following major stages. Steel sheet, light plate, structural shapes, and bars were cut, rolled, shaped, and welded into equipment components. Metal components were joined with manual and automatic feed welding, conventional metal-arc welding, and specialized submerged-arc welding. Parts for specialized motors were machined from castings and the motors were assembled. Screen cloth was stretched and bonded to rings using spot welding or special epoxy bonding techniques. Completed units were assembled from these components as required.

For the exclusive use of S. Sayeste, 2018.

This document is authorized for use only by Sibiya Sayeste in Strategic Managment taught by Fairweather, Peter, SUNY - New Paltz from January 2018 to May 2018.

380-167 SWECO, Inc. (A)

4

Manufacturing costs were divided approximately as follows:

Materials 57% Direct labor 13 Manufacturing overhead 30_ 100%

SWECO manufactured virtually all fabricated steel components, electric drive systems, and cast polyurethane components in-house. It purchased woven wire cloth, nuts and bolts, raw steel sheet and plate, motor bearings, rubber parts, and castings. Most of these purchases were made through local suppliers (although the woven wire cloth came from West Germany or Switzerland). Few volume discounts were available from suppliers.

Manufacturing overhead consisted of plant management, production control, scheduling and administrative personnel, plant costs such as rent, power, and supplies, depreciation on equipment, and special tooling.

The divisions existed for marketing and administrative purposes, whereas manufacturing, engineering, and accounting remained independent functions. The divisions and head office together had 40 marketing and sales employees, 35 management and general administrative employees, 25 engineering employees, and 25 accounting employees.

The compensation system consisted of hourly pay for direct labor employees and salary for most other employees. Management also received a profit-based bonus, and there was a discretionary bonus for other employees. Sales-people received both salary and commission. There was also a profit-sharing retirement fund for all salaried employees.

The chairman of the board was Robert P. Miller, Jr., 54 years old, a member of the Miller family that owned a major portion of the company. Miller had recently been appointed chairman and had previously been vice president of the Vibro-Equipment Division. Miller had joined SWECO 6 years previously, after running a graphite mining business of his own. Howard W. Wright, Jr., 50 years of age, had joined the company in 1956 as vice president of the Separator Division and had been SWECO's president since 1963. Howard Wright was Robert P. Miller, Sr.'s son-in-law. Zack Mouradian, 47 years of age, had recently been appointed group vice president and coordinated the marketing activities of SWECO's three operating divisions. Mouradian, who joined the company in 1957, had previously headed the separator division for 7 years. (See Figure A for an organization chart.)

For the exclusive use of S. Sayeste, 2018.

This document is authorized for use only by Sibiya Sayeste in Strategic Managment taught by Fairweather, Peter, SUNY - New Paltz from January 2018 to May 2018.

SWECO, Inc. (A) 380-167

5

Figure A Organization Chart

The Sand Separator-Mud Cleaner

Background

Early in 1971 Zack Mouradian received a phone call from Dr. Peter Hamilton. Hamilton told Mouradian that the oil company whose production research unit he headed had been experimenting with conventional fine screens in the separation of sand from the drilling fluid ("mud") used in drilling oil and gas wells. The oil company now wished to conduct additional experiments and had contacted SWECO because of its reputation as the leading industrial fine-screen separator manufacturer.

SWECO had made two abortive attempts to enter the oil field service business, with a SWECO industrial separator to be substituted for a shale shaker.1 Both attempts, in the late 1940s and the late 1960s had failed. In retrospect, SWECO thought it had made two fundamental errors. It had thought it could just sell the equipment without providing service and maintenance. Also, the equipment had been too light duty for oil field conditions and could not handle the high flow rates encountered in drilling applications.

Mouradian decided to assign Les Hansen to work with Dr. Hamilton on this newest effort. Hansen had joined SWECO in 1970 in the development engineering laboratory. Hansen was 27 years of age and his previous business experience was limited to his year with SWECO as an applications engineer and process trouble-shooter. His education included some engineering training and a degree in economics. He was currently attending law school part-time.

1 A shale shaker was a standard type of mud-cleaning equipment, to be described below.

For the exclusive use of S. Sayeste, 2018.

This document is authorized for use only by Sibiya Sayeste in Strategic Managment taught by Fairweather, Peter, SUNY - New Paltz from January 2018 to May 2018.

380-167 SWECO, Inc. (A)

6

Solids Control Equipment

In drilling for oil and gas, a slurry (called drilling mud) of liquid, solids, and chemicals was pumped through the drill pipe to wash away the cuttings created by the drill bit and to bring them to the surface. Depending on the depth of the hole and other factors, the liquid used was water or oil. Generally, the deeper the hole the denser the drilling fluid needed to be. Hence at depths of about 10,000 feet or more, a high-density material called barite (barium sulfate) was added to the drilling mud. Barite's specific gravity was 4.2, compared with only 2.6 for typical rock-formation solids.

The drilling mud coming out of a well needed to be cleaned to remove the cuttings or drill solids before it could be recirculated downward into the well. Although no process could eliminate all of the drill solids from a mud system, maximum removal was highly desirable. Reduced drill solids content of muds improved bit life and minimized drilling problems such as pipe sticking. At their worst, mud problems could stop drilling altogether.

Unfortunately, existing processes for removing fine drill solids also removed the barite. Barite was so expensive that the cost of weighted mud often represented 10% to 15% of drilling costs. Conventional approaches for handling drill solids included chemical treatment, dilution, settling pits, and mechanical removal techniques. The suitability of particular techniques depended largely on the weight of the mud. The oil company that had contacted SWECO was working on the problem of solids control in heavier muds.

Three types of mechanical devices for removing drill solids were currently used in oil fields: shale shakers, hydrocyclones, and centrifuges. A shale shaker was similar in principle to industrial separators, with materials separated through a vibratory screening process. Generally a standard shale shaker could remove solid particles larger than 500 to 1,000 microns.2 More efficient fine-screen shale shakers could remove particles as small as 177 microns, using an 80-mesh screen.

Hydrocyclones (also called desanders and desilters) removed smaller particles in the 10- to 60-micron range, using the principle of centrifugal force. Hydrocyclones rotated the mud at high speeds in a cone-shaped container. Lighter, cleaned drilling mud would exit from the top of the cone, while the heavier solids gravitated to the bottom, where the rotation speed was the highest. Unlike shale shakers, however, desanders and desilters3 could deal only with unweighted muds. For muds above about 10 lbs./gallon (i.e., weighted with barite) an excessive amount of the barite was discharged and lost in the cleaning process because small, heavy barite particles would discharge from hydrocyclones as fast as smaller lighter fine drill solids. For example, a desilter operating on mud weighted with barite would discard $7 worth of barite a minute.

Centrifuges used much the same principle as hydrocyclones, but processed smaller volumes and used higher G-forces. Centrifuges could remove very small particles, in the 3- to 5-micron range, and could be used with very heavily weighted muds (those above 13 lbs./gallon), but they could not remove solids in the larger size range.

Thus, there was a gap in fine solids removal between the capabilities of shale shakers and centrifuges. The problem on which Dr. Hamilton was working was how to remove drilled solids in the 74- to 177-micron range from weighted mud. Particles this size were out of the reach of shale shakers or centrifuges, but impractical for hydrocyclones.

2 25 microns = 0.001 inch. 3 Desanders and desilters handled progressively finer particles.

For the exclusive use of S. Sayeste, 2018.

This document is authorized for use only by Sibiya Sayeste in Strategic Managment taught by Fairweather, Peter, SUNY - New Paltz from January 2018 to May 2018.

SWECO, Inc. (A) 380-167

7

The Solution

In mid-1971 Hamilton came to SWECO's laboratory in Los Angeles and, working with Les Hansen, began to experiment with techniques to remove drill solids in the 74- to 177-micron range while retaining barite. The arrangement was that the oil company and SWECO would each bear its own costs in these experiments. The oil company hoped to stimulate development of a product that would reduce drilling costs.

The process selected was one that combined a shale shaker, hydrocyclones and a SWECO fine-screen separator in three stages. First, the mud flowed through the shale shaker, which removed large solids. The mud then passed through second-stage hydrocyclones that separated it into low- density and high-density materials. The low-density material returned to the mud system. The high- density material containing barite and fine drill solids flowed through another, smaller screen, which passed the fine barite but rejected the drill solids larger than about 74 microns.

The first-stage shale shaker was a conventional unit of the type already in use in oil fields, and was not a SWECO product but was rented or purchased by the operator from any of a number of suppliers. The (second) hydrocyclone stage was performed by a desilter, also a standard product, although built into the SWECO unit. SWECO purchased desilters from Pioneer Centrifuge Co., Inc., a small manufacturer of solids control equipment. The third stage was provided by a specialized variant of SWECO's industrial separator, which was a higher-technology unit than separators currently in use in oil field applications. A bank of the Pioneer hydrocyclones was combined with a SWECO fine-screen separator into one unit, referred to as the sand separator (see Exhibits 3 to 6).

In collaboration with Hamilton's company, SWECO ran several field trials with a number of progressively improved prototype machines at a number of drilling sites over a 12-month period. These experiments showed that the fine-screen separator had to run 50% faster than SWECO's industrial separators, which meant that the vibration-induced stresses were about five times greater than normal. The oil field unit also had to be more rugged than SWECO's industrial products because of its treatment by oil field workers, known as roughnecks. A SWECO machine installed in, for example, a food processing plant was well maintained and treated with care; in the oil field trials SWECO sand separators were sometimes unloaded from the delivery truck by tying a chain around the unit, attaching the chain to the drilling rig, and driving the truck out from under the separator.

By the fall of 1972, data from the field tests had been compiled from several drilling sites. In one controlled test in a deep well in Louisiana, round-the-clock operating data proved that the separator was able to remove drill solids while saving barite. In addition, the separator had prevented downtime from stuck drill pipe, common on such wells, by providing superior solids removal. Hamilton's oil company estimated that using the mud cleaner led to combined savings of over $100,000 on the well. The oil company was now satisfied with the technique and suggested that SWECO market mud cleaners commercially. By this time SWECO had spent approximately $100,000 on the development effort.

SWECO calculated that each sand separator unit would cost about $5,000 to manufacture in regular, large-scale production, broken down as shown in Table A. SWECO thought the sand separator could be rented at the same daily rate as a centrifuge, or $100.

In addition, each unit would require an electric or diesel-powered pump. SWECO could assemble these from purchased components for $3,000 and $6,000 respectively. Similar units were used by many drilling contractors to drive other pieces of solids control equipment, and typically rented for about $30 and $40 a day, respectively.

For the exclusive use of S. Sayeste, 2018.

This document is authorized for use only by Sibiya Sayeste in Strategic Managment taught by Fairweather, Peter, SUNY - New Paltz from January 2018 to May 2018.

380-167 SWECO, Inc. (A)

8

Table A

Purchased Materials Labor Other Total

Vibrating screen $1,000 $ 400 $ 800 $2,200 Skid 200 100 300 600 Motor starter 400 — — 400 Hydrocyclones 1,800 — — 1,800

$3,400 $ 500 $1,100 $5,000

In operation, the sand separator wore out its fine screen every 10 days or so. SWECO sold similar replacement screens for between $100 and $200 to its existing industrial customers.

The Oil Field Service Industry

In 1972 a major boom in the oil and gas industry was under way, and was expected to continue over the next several years. In 1971 almost 26,000 onshore and offshore oil and gas wells were drilled in the United States. That number was expected to increase to 27,000 in 1972, and by at least an additional 1,000 wells per year over the next five years. The average depth of these wells was 5,000 feet, with an average drilling cost of $19 per foot, increases of 17% and 48% respectively over a ten-year period. Drilling costs varied with the geographic location of the well, the type of formations penetrated, and the depth. In 1972 drilling costs in the United States ranged from $15 for shallow wells to $45 per foot for wells up to 15,000 feet in depth. Average depths were expected to continue to increase as part of the process of increasing exploitation of more "difficult" oil and gas locations.

Drilling activity in the United States was geographically concentrated, with six states accounting for the bulk of wells (see Table B). Almost 80% of world drilling activity took place in the United States, and only 1% in the Middle East. U.S. wells were much deeper on average than wells in other parts of the world, and therefore made much greater use of weighted drilling fluids and solids control equipment.

In the United States most wells were drilled by drilling contractors under contract to an operator (oil company).4 There were many hundreds of drilling contractors, most very small businesses. Approximately 90% owned five or fewer drilling rigs. The drilling contractor was responsible for putting together a basic package of the equipment necessary to drill a well. It was standard practice in 1972 for the contractor to be paid a flat day rate by the operator. The operator then paid for the rental of special equipment and services, such as drilling mud and solids control equipment. Standard practice was for the contractor to own some such equipment, and for the operator to rent additional equipment. Thus contractors did not rent, and operators did not buy.

4 The term operator applies to the oil company owning the hole. Actual drilling operations were carried out by the drilling contractor.

For the exclusive use of S. Sayeste, 2018.

This document is authorized for use only by Sibiya Sayeste in Strategic Managment taught by Fairweather, Peter, SUNY - New Paltz from January 2018 to May 2018.

SWECO, Inc. (A) 380-167

9

Table B

State Number of Wells in 1971a

Texas 7,315 Louisiana 3,806 Oklahoma 2,490 Kansas 2,413 California 2,157 Ohio 1,157 19,338 Other 6,513

Total 25,851

Source: American Petroleum Institute and the American Association of Geologists, published in Basic Petroleum Data Book: Petroleum Industry Statistics, 1978. a. Exploratory and development wells, both onshore and offshore.

The key piece of equipment was the drilling rig itself. There were about 1,100 active rigs in the United States in 1971, and this number was generally expected to increase by about one hundred per year over the next few years. Although the drilling contractor owned the rig, suppliers provided specialized pieces of purchased or rented ancillary equipment, as well as many other services used in drilling. These suppliers constituted the oil field service industry, with revenues of about $3 billion in 1972.5

Oil field services included:

1. Well logging: the measurement of drilling parameters such as depth, weight on the drilling bit, torque, pump pressure, pump rate and geological statistics.

2. Drill bits.

3. Cementing of holes after drilling, to prepare for regular production of oil or gas from the holes.

4. Down-hole tools, such as stabilizers and directional tools.

5. Drilling mud.

6. Rental equipment, including solids control equipment.

Rental equipment included maintenance on a 24-hour, on-call basis as a major part of the service.

Drilling Mud

Barite-weighted drilling mud was used in most deep holes, and solids control equipment was needed to keep this mud clean of drill solids. Deep holes were those over 10,000 feet, and about 1,500 such holes had been drilled in the United States in 1971. About 900 of the 1,100 drilling rigs active in 1971 were capable of drilling more than 10,000 feet, and were distributed as follows:

5 The total U.S. oil and gas production industry had expenditures of over $10 billion in 1972, split about evenly among exploration, development, and production.

For the exclusive use of S. Sayeste, 2018.

This document is authorized for use only by Sibiya Sayeste in Strategic Managment taught by Fairweather, Peter, SUNY - New Paltz from January 2018 to May 2018.

380-167 SWECO, Inc. (A)

10

Texas 280 Louisiana 240 California 50 Alaska 10 All other 320 900

Of these 900 rigs only about 400 were significant users of solids control equipment, because of the characteristics of the areas in which they were drilling: high drilling mud costs; soft sand formations; high waste disposal costs; high logistics costs; deep holes. The major suppliers of drilling mud were the Magcobar Division of Dresser Industries, the Baroid Division of NL Industries, and the IMCO Services Division of the Halliburton Company. Precise estimates of market size were difficult to obtain, but the annual market for drilling mud in 1972 was approximately $500 million in the United States and $150 million overseas.

Drilling mud was marketed primarily through a sales force that called on drilling contractors and oil companies. The oil drilling industry was well known for being a tight-knit community. Business in the oil field service market was typically sold on a per-hole basis. Advance knowledge from personal contacts of when and where holes would be drilled was crucial. It was necessary to sell both to the head office and local office of the oil company owning a hole, and to the contractor drilling the hole.

As part of the drilling mud service, all the companies also provided mud engineers who were responsible for maintaining the mud in a suitable condition during drilling operations. These mud engineers spent a great deal of time on-site and were virtually members of the drilling contractor's team.

Solids Control Equipment

The market for solids control equipment was approximately $40 million domestically and perhaps $10 million overseas in 1972. About 85% of the domestic market for equipment was rental, with the remainder purchased equipment and aftermarket sales. The major items of equipment were

% of Rental Market (measured by rental revenues)

Shale shaker 24% Desander (hydrocyclone) 7 Desilter (hydrocyclone) 13 Centrifuge 17 Power unit 38__ 100%

The power unit consisted of the motor and pump that fed the desander and the desilter. A closely related piece of mud control equipment was the degasser, which separated unwanted gases from the mud. Degasser revenues were equivalent to about one-third of total solids control revenues. Of the U.S. rig population in 1972 of about 1,200 active rigs, perhaps 85% used shale shakers, 50% degassers, 25% desanders, 60% desilters, and 10% centrifuges. Daily rental rates were around $40 for all units except the centrifuge, which had a rental rate of about $100 per day.

The effectiveness of solids control equipment was very difficult to judge precisely. The benefits of the equipment were reduced mud costs, reduced drilling time, reduced downtime from pipe sticking, improved drill-bit life, and lower wear and tear on pumps (owned by the contractor). None of these benefits could be readily quantified, however, because the amount of barite used, drill-

For the exclusive use of S. Sayeste, 2018.

This document is authorized for use only by Sibiya Sayeste in Strategic Managment taught by Fairweather, Peter, SUNY - New Paltz from January 2018 to May 2018.

SWECO, Inc. (A) 380-167

11

bit life, and downtime were all subject to many influences besides the solids control equipment. Thus drilling contractors and operators tended to rely on the reputation of the supplier in purchasing solids control equipment. Also, the performance of solids control equipment was generally similar among existing suppliers, since the technology was well known. What was more crucial was the level of service. Each hour of downtime cost the operator hundreds of dollars onshore, and thousands offshore. Contractors were not directly motivated to avoid downtime because they were paid a flat daily fee. They were, however, motivated to minimize their load of activities and equipment, since they were responsible for its operation. Thus contractors tended not to be receptive to new types of equipment unless the associated benefits were fairly obvious.

Problems with oil field equipment were frequent because of the nature of the drilling process, the typically adverse operating conditions, and rough treatment in the hands of rough-necks. Equipment suppliers had to provide 24-hour on-call service over a very wide area. Sunday morning at 3 a.m. seemed to be the most frequent time for breakdowns! Despite the importance of minimizing downtime, drilling contractors did not place solids control equipment high on their list of priorities because of the innumerable other problems they faced.

Solids control equipment was generally rented rather than sold because the type of equipment needed for particular wells varied widely. The service component generally accounted for more than one-third of the rental fee.

Solids control equipment suppliers maintained service networks consisting of a number of service centers, located near drilling areas. A prime area might have up to 100 rigs requiring solids control equipment. A minimum-size service center might service an area of approximately 200 miles in radius and be staffed by five people: a service-center manager and four service reps. Such a center cost about $150,000 to maintain annually in 1972, excluding the cost of the rental equipment, with half of that cost being salaries. Such a service center could support $500,000 in rental revenues a year, based on a 50% use rate for its rental equipment. An average rental period per hole was about six weeks, although there was great variation from hole to hole.

Suppliers of solids control equipment depreciated their equipment over about a seven-year period. Over this period the equipment would be extensively refurbished. Perhaps as much as 7%– 10% of rental revenues would be plowed back as refurbishment each year.

Competition

The industry leader in the solids control equipment industry was the SWACO division of Dresser Industries, followed by the Baroid Division of NL Industries and a number of other firms, including Baker Industries, Brandt, and Pioneer.

Dresser Industries

Dresser Industries had revenues of $905 million and pretax earnings of $66 million in the year ending October 1972. The breakdown of sales and earnings by business segment is shown in Table C.

Petroleum Group. The Petroleum Group provided a wide range of products and services to the exploration, drilling, production, and marketing segments of the oil and gas industries, as well as to mining and other industries. The principal products and services of the group included drilling mud additives, well logging and completion services, drill bits, down-hole tools, and other oil field equipment. The group also manufactured gasoline pumps and allied equipment for gasoline service stations.

For the exclusive use of S. Sayeste, 2018.

This document is authorized for use only by Sibiya Sayeste in Strategic Managment taught by Fairweather, Peter, SUNY - New Paltz from January 2018 to May 2018.

380-167 SWECO, Inc. (A)

12

Drilling mud and solids control equipment accounted for about $100 million, or one-third of this group's revenues, of which drilling mud represented approximately $90 million. Drilling muds and related services were marketed under the Magcobar trademark. The services included Magcobar engineers who provided on-site, round-the-clock analysis and advice.

The SWACO division manufactured equipment for use in drilling, including shale shakers, desilters, and degassers. Although SWACO and Magcobar were organizationally separate, they shared the same sales force. SWACO had the largest market share in the solids control equipment market (which excluded degassers), about 30%. SWACO had very high visibility among operators and contractors and was widely recognized as the market leader. SWACO had about 25 to 30 oil field service locations in 1972.

Table C

% Revenues % Pretax Earnings

1969 1970 1971 1972 1969 1970 1971 1972

Petroleum Group 36% 37% 40% 35% 33% 30% 32% 32% Machinery Group 26 26 24 26 16 13 15 13 Refractories and Minerals Group 21 20 18 16 28 34 23 18 Industrial Specialties Group 17 17 18 23 23 23 30 37

Table D

% Revenues % Pretax Earnings

1969 1970 1971 1972 1969 1970 1971 1972

Chemicals Group 17% 19% 19% 20% 19% 27% 35% 32% Metals Group 29 30 27 29 12 15 7 8 Pigments Group 23 23 23 21 33 27 9 24 Fabricated Products Group 23 20 21 21 29 25 39 30 Industrial Specialties Group 3 3 3 3 4 3 1 3 Other activities 5 5 7 6 3 3 9 3

Machinery Group. This group produced compressors, blowers, pumps, and engines for municipal water systems and for the oil, gas, chemical, refining, paper, water pollution control, and other industries. Other activities included air pollution control and materials handling.

Refractories and Minerals Group. This group mined and processed barite, bentonite, and lignite and supplied these to the Petroleum Group for use in drilling mud. The group also mined industrial sand, kaolin, and metallic sulfide ore. The other major activity was the mining, manufacturing, and marketing of refractories, which were nonmetallic mineral products used chiefly to line industrial high-temperature vessels.

Industrial Specialties Group. This group manufactured a broad line of pneumatic tools for various industrial uses, and hand tools for light service trades and home use. The group also manufactured abrasives, grinding wheels, coated abrasive doth, and related equipment. Other products included gauges, thermometers, and switches and valves for instrumentation or control of processes in the refining, chemical, petrochemical, electric power generation, and fire protection industries.

NL Industries

NL Industries (formerly National Lead) had revenues of $1,014 million in 1972, with pretax earnings of $62 million (see Table D).

For the exclusive use of S. Sayeste, 2018.

This document is authorized for use only by Sibiya Sayeste in Strategic Managment taught by Fairweather, Peter, SUNY - New Paltz from January 2018 to May 2018.

SWECO, Inc. (A) 380-167

13

Chemicals Group. This group supplied the petroleum industry with drilling mud additives and specialized water-treating and corrosion-inhibiting chemicals. It also furnished extensive engineering services and equipment for well logging and testing.

The Baroid Division represented about 55% of the group's 1972 revenues, and had supplied drilling mud for almost 50 years. It had entered the solids control equipment business in the 1950s. The same sales force sold both drilling mud and mud control equipment. Approximately 80% of Baroid's revenues came from selling mud, 10% from solids control equipment, and 10% from other oil field service activities. Baroid maintained oil field locations, service reps, and mud engineers worldwide. Baroid purchased a great deal of its solids control equipment from other manufacturers. For example, desilters were purchased from Demco, screens were purchased from SMICO, and centrifuges were purchased from Bird.6

The other major activity of the Chemicals Group was the production and sale of anticorrosive pigments, stabilizers, flame retardants, extender pigments, castor oil derivatives, and chemical specialties for use by the plastics, paint, ink, and adhesives industries, and of gellants for paint, grease, pharmaceutical, and cosmetics producers.

Industrial Specialties Group. This group produced zirconium and titanium chemicals for the ceramic and electronic industries, and made process alloys for the aerospace industry. It also produced and distributed to hospitals and doctors radio-pharmaceuticals for use in nuclear diagnostic medicine. NL was also the contract-operator for one of the Atomic Energy Commission's feed materials production centers. The group also sold Dutch Boy paints.

Others. The Metals Group produced lead products, precious metals products, and zinc and aluminum products. Its customers included the electronic, jewelry, photographic, aerospace, and railroad industries. The Pigments Group was a leading producer of titanium pigments, used principally by the paint, paper, plastics, and rubber industries. The Fabricated Products Group manufactured custom die castings for use in the production of automobiles, trucks, electrical appliances, office machinery, hand tools, and hardware.

The Brandt Company

Brandt was believed to be the third largest supplier of solids control equipment, with a market share of approximately 7%. Brandt's total revenues in 1971 were less than $3 million. Brandt sold shale shakers only and had been in business for less than five years. Brandt emphasized the ruggedness and simplicity of its equipment, and it had a much smaller service operation than other suppliers. Brandt sold its equipment directly to drilling contractors and was not in the rental business. Thus Brandt did not maintain any service centers.

Baker Oil Tools, Inc.

Baker Oil Tools had revenues of $151 million and pretax earnings of $10 million in 1972. International operations accounted for just under 40% of revenues. Baker's revenues came from the segments shown in Table E.

Drilling products. In 1971 Baker had acquired Milchem for $12 million, thereby entering the drilling fluid business. Milchem sold both drilling mud and solids control equipment, with the revenue from mud approximately 95% of sales. Other components of Baker's Drilling Products Group manufactured and marketed hole expanders, drill pipe controls, and well logging equipment. Milchem's products and services, along with other Baker petroleum products and services, were distributed primarily through Baker's 140 oil field service locations.

6 These companies all manufactured process equipment for a variety of industries.