Tight supplies continue for drilling consumables

Manufacturers slowly responding with growth

Victor Schmidt
International Editor

• Manufacturing constraints limit output of completed drillpipe [33,627 bytes]

For months, the industry has discussed growing shortages in critical supplies and equipment. The shortage is most evident in the strong demand for a limited number of drilling rigs. Utilization remains high with no near term slackening expected, even with current low oil prices. Offshore rig utilization is expected to average 97% through 1998.

However, high rig use means high demand for consumables of all types.The existing fleet must be supplied. Refurbished rigs are returning to work and new rigs will enter the market over the next few years. Every part of the "feeding chain" must grow to meet demand.

In addition, rigs are more efficient now than they were in the 1970's expansion. These rigs will drill more wells per rig per year during the current expansion. The wider market is beginning to respond by adding capacity to feed the industry's need for basics such as drillpipe, premium tubulars, and completion equipment. Past supplies of used equipment are quickly depleting. A new cycle has begun in oil country manufacturing.

Used drill pipe

The worldwide oilfield industry consumes approximately 15 million feet of drill pipe per year. After the oil price collapse of 1986, several pipe producers left the business due to the extreme overhang of used pipe available on the open market.

Standard drillpipe, suitable for most uses, became a saturated market. Manufacturers were forced to survive by making production casing and specialty drillstrings (high H2S tolerance among other types). The supply overhang was worked off in the intervening time. Competitiors were thinned by former hard times.

Only five main competitors remain standing: Grant-Prideco, NKK-Bohai, IDPA, OMSCO and H-Tech. Grant-Prideco has the largest market share (55%) at this time. Manufacturing capacity is approximately 14 million feet per year, so some expansion in capacity is expected. This leaves the short-term problem of finding enough affordable, used drill pipe. Used drill pipe makes up around 15% of the total market, down from 70% in 1994.

Rising through 2000

Prices of new drillpipe continue to rise. Drill pipe costs rose from around $18 per ft to $22 per ft in 1996, $27 per ft in 1997, and are expected to rise into the $32-33 per ft range this year. Prices could rise to over $40 per ft before 2000, due to backlogged orders and the need to build buffer supplies.

Growth is possible now. However, pipe manufacturers are unwilling to invest in new welding, heat treatment, and inspection capacity. A complete line generally costs around $5 million.

Drill pipe shortages are creating delays in some drilling programs. At least one operator has responded to tightening supply by securing manufacturing capacity. BP avoided supply problems by signing an exclusive supplier agreement with Sumitomo Metal Industries in September 1997.

The contract will secure BP's pipe supplies for the next five to seven year period. By that time, the supply squeeze will be past. Similar long-term agreements with drill pipe manufacturers could underwrite the building of new capacity.

Premium tubulars

Natural gas and deepwater drilling is increasing the use of premium tubulars by 25-30% per year. Stable prices prevail but deepwater and hostile environment drilling continue to expand demand. Premium tubulars are used in several environments: high cost, high temperature, high pressure, and high corrosion.

Natural gas well completions (offshore and onshore) in the US have risen steadily since 1995 from around 1,814 per quarter in 1995 to 3,040 in the fourth quarter of 1997. For the Gulf of Mexico around 25% of the wells drilled require premium tubulars.

All deepwater wells use high-specification casing strings. Oil companies order casing only when they are ready to complete a well, so premium tubulars must be readily available. A strong inventory and good supplier network are critical to the smooth operation of the offshore completion industry.

Artificial lift growth

Worldwide demand for artificial lift systems is growing at 5-7% per year. Over 60% of the world's oil wells are on some form of artificial lift, and that market is primarily in the US.

Demand is growing 16-18% outside the US as older fields deplete to the point where natural flow pressures are exhausted. Strong growth is expected to continue for the next five years. This technology is divided into five main types:

• Rod-pump
• Electric submersible pump
• Gas lift
• Progressive cavity pumps
• Hydraulic lift

Rod pump systems are limited to less than 10,000-ft well depths. They cost around $100,000, but are less inexpensive to operate. Electric submersible pumps are best for wells over 10,000-ft deep.

These wells cost around $100,000 per installation and have similar operating costs. Progressive cavity pumps are limited to 6,000 ft, but cost only $15,000 to install and around $10,000 per year to operate. Both gas lift and hydraulic lift are niche markets with slow growth expectations.

New opportunities

Manufacturers are responding to the industry's needs by building new capacity, buying related businesses to expand offerings, and creating special arrangements to fund expansion. The major problem is lag time.

Demand is growing strongly now but it takes time to bring new capacity online, train workers, establish efficient production and produce consistent quality. These problems mean major opportunities for the manufacturers and higher costs for the industry in the short term. The message is simple: the industry will get the consumables and tools it needs to do its job, but at a price.

Acknowledgement

This article is derived from SalomonSmithBarney reports and discussions with drillpipe manufacturers.

Copyright 1998 Oil & Gas Journal. All Rights Reserved.