National Oilwell Varco 2010 Annual Report Download - page 4

The majority of the Companys revenue from Petroleum Services & Supplies is closely tied to drilling activity, although a portion is related to
the sale of capital equipment to drilling contractors, which may somewhat lag the level of drilling activity. Portions of the segments revenue that
are not tied to drilling activity include (i) the sale of progressive cavity pumps and solids control equipment for use in industrial applications, and
(ii) the sale of fiberglass and composite tubing to industrial customers, which is generally unrelated to drilling or well remediation activity but
may be tied somewhat to oil and gas prices.
The Companys revenue from Distribution Services is almost entirely driven by drilling activity and oil and gas production activities. Drilling
and well servicing activity can fluctuate significantly in a short period of time.
The willingness of oil and gas operators to make capital investments to explore for and produce oil and natural gas will continue to be influenced
by numerous factors over which the Company has no control, including: the ability of the members of the Organization of Petroleum Exporting
Countries (OPEC) to maintain oil price stability through voluntary production limits of oil; the level of oil production by non-OPEC countries;
supply and demand for oil and natural gas; general economic and political conditions; costs of exploration and production; the availability of new
leases and concessions; access to external financing; and governmental regulations regarding, among other things, environmental protection,
climate change, taxation, price controls and product allocations. The willingness of drilling contractors and well servicing companies to make
capital expenditures for the type of specialized equipment the Company provides is also influenced by numerous factors over which the Company
has no control, including: the general level of oil and gas well drilling and servicing; rig dayrates; access to external financing; outlook for future
increases in well drilling and well remediation activity; steel prices and fabrication costs; and government regulations regarding, among other
things, environmental protection, taxation, and price controls.
See additional discussion on current worldwide economic environment and related oil and gas activity levels in Item 1A. Risk Factors and Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations.
Overview of Oil and Gas Well Drilling and Servicing Processes
Oil and gas wells are usually drilled by drilling contractors using a drilling rig. A bit is attached to the end of a drill stem, which is assembled by
the drilling rig and its crew from 30-foot joints of drill pipe and specialized drilling components known as downhole tools. Using the
conventional rotary drilling method, the drill stem is turned from the rotary table of the drilling rig by torque applied to the kelly, which is
screwed into the top of the drill stem. Increasingly, drilling is performed using a drilling motor, which is attached to the bottom of the drill stem
and provides rotational force directly to the bit, rather than such force being supplied by the rotary table. The use of a drilling motor permits the
drilling contractor to drill directionally, including horizontally. The Company sells and rents drilling motors, drill bits, downhole tools and drill
pipe through its Petroleum Services & Supplies segment.
During drilling, heavy drilling fluids or drilling muds are pumped down the drill stem and forced out through jets in the bit. The drilling mud
returns to the surface through the space between the borehole wall and the drill stem, carrying with it the drill cuttings drilled out by the bit. The
drill cuttings are removed from the mud by a solids control system (which can include shakers, centrifuges and other specialized equipment) and
disposed of in an environmentally sound manner. The solids control system permits the mud, which is often comprised of expensive chemicals, to
be continuously reused and recirculated back into the hole.
Through its Rig Technology segment, the Company sells the large mud pumps that are used to pump drilling mud through the drill stem.
Through its Petroleum Services & Supplies segment, the Company sells transfer pumps and mud pump consumables; sells and rents solids
control equipment; and provides solids control, waste management and drilling fluids services. Many operators internally coat the drill stem to
improve its hydraulic efficiency and protect it from corrosive fluids sometimes encountered during drilling, and inspect and assess the integrity of
the drill pipe from time to time. The Company provides drill pipe inspection and coating services, and applies hardbanding material to drill
pipe to improve its wear characteristics. These services are provided through the Petroleum Services & Supplies segment. Additionally, the
Petroleum Services & Supplies segment manufactures and sells drill pipe.
As the hole depth increases, the kelly must be removed frequently so that additional 30-foot joints of drill pipe can be added to the drill stem.
When the bit becomes dull or the equipment at the bottom of the drill stem  including the drilling motors  otherwise requires servicing, the
entire drill stem is pulled out of the hole and disassembled by disconnecting the joints of drill pipe. These are set aside or racked, the old bit is
replaced or service is performed, and the drill stem is reassembled and lowered back into the hole (a process called tripping). During drilling
and tripping operations, joints of drill pipe must be screwed together and tightened (made up), and loosened and unscrewed (spun out). The
Rig Technology segment provides drilling equipment to manipulate and maneuver the drill pipe in this manner. When the hole has reached
certain depths, all of the drill pipe is pulled out of the hole and larger diameter pipe known as casing is lowered into the hole and permanently
cemented in place in order to protect against collapse and contamination of the hole. The casing is typically inspected before it is lowered into the
hole, a service the Petroleum Services & Supplies segment provides. The Rig Technology segment manufactures pressure pumping equipment
that is used to cement the casing in place. 4