Oil Powers Global Industry
Thirst for oil and gas won't be satisfied any time soon
By Jim Lorincz
The need to find replacement supplies of oil and gas to match the global thirst for energy will spur a double-digit rise in capital spending plans of the oil companies for the next couple of years. With the economies of China and India continuing their growth as the next big consumers of oil, the longer term outlook is similarly positive—at least on the demand side.
"The world's primary energy needs are projected to grow by 55% between 2005 and 2030 with demand reaching 17.7 billion tonnes of oil equivalent, compared with 11.4 billion tonnes in 2005 according to the International Energy Agency (IEA)," says Thomas F. Kelly, a San Francisco-based senior manager in Accenture's Manufacturing Supply Chain practice. Kelly outlines the key assumptions underlying the global industry's actions as it ramps up activities for the foreseeable future:
- The decline in oil-production and gas output at existing fields.
- Development of oil and gas will be needed to meet the estimated increased consumption of 116 million barrels per day (b/d) in 2030, 37% or 32 million b/d more than in 2006 (IEA World Energy Outlook 2007) in the face of global economic growth, especially from the developing countries such as China and India.
- The lion's share of this development will take place in the Middle East, in Russia, in South America and also in offshore areas.
World consumption of oil is more than 85 million b/d, according to an American Petroleum Institute (API; Washington) study delivered in May 2006. API commissioned the study to explain to anxious American consumers and policy makers the workings of supply and demand and why fuel bills were getting more expensive.
And that was when the price of a barrel of crude oil had just passed $70, a far cry from today's price in the mid-to-upper-90 dollar/barrel range and well above the $60/barrel threshold needed to encourage aggressive investment in developing even the least promising or more difficult-to-access resources.
"The price of crude oil is the most significant factor determining the price paid for petroleum products," the API study says. "Consequently, the price of gasoline is largely determined by the worldwide demand for and supply of crude oil."
Because oil is a global commodity, where it is found and produced and where it is consumed continues to challenge every aspect of exploration, development, and transportation. The eight largest oil companies are all OPEC members, and all are national oil companies (NOC). Hiccups in any of the producing areas can throw global pricing into chaos.
- Oil reserves (2003 estimates) for the largest oil companies are ranked in this order by API: Saudi Aramco (Saudi Arabia) with 259 billion barrels, or 21.8%; NIOC (Iran) with 10.59%; INOC (Iraq) with 9.68%; KPC (Kuwait) with 8.33%; PDV (Venezuela) with 6.55%; and Admoc (UAE) with 4.65%.
NOCs account for about 65% of oil production; the Super Majors including Exxon, BP, and Shell account for 25–30%; the independent oil companies account for 5–10%.
- The rank of consuming regions mirrors the distribution and concentration of global industrial economic activity. Oil consumption by region is Asia Pacific (30%); US (25%); Western Europe OEDC (19%); Middle East (7%); South and Central America (6%); Eastern Europe, Russia, and Eurasia (5%); rest of America (5%); and Africa (3%).
Year-on-year increases in capital spending are likely to be the rule. A Credit Suisse report, 2008 Outlook for Drilling & Completion Spending, estimates drilling and completion spending to "increase by approximately 15% in 2008 vs. 2007, with another double-digit increase in 2009." The IEA in its World Energy Outlook 2007 paints the same increase in spending scenario with a projection of "some $22 trillion of investment in supply infrastructure" needed in the coming years to meet the production of global demand for energy.
"Those figures probably don't include spending for the land," Kelly says. "It's just pure capital investment for people, services, and equipment needed to develop new sources of oil and stretch what they have through stimulation of existing reservoirs."
Investment by the energy services segment, the multinationals that supply the technology, tools, and resources to the oil companies for upstream drilling and completion, will increase in lockstep with the increased oil company investment activity. "In order to accommodate this projected growth, these firms are continuously re-evaluating their supply chain, including their manufacturing and sourcing strategies, in concert with looking for ways to optimally expand their global footprint," Kelly adds.
Although a good part of the investment will be made in the areas of greatest activity, namely in Russia, the Middle East, and South America, the Credit Suisse report also sees spending will be made in North America, India, North and West Africa, and China.
The bellwether of future trends in investment in the global oil market is found in an analysis of the numbers and kinds of drill rigs that will be planned, drilled, and active as reported monthly by Baker Hughes Inc.'s (BHI) International Rotary Rig and North American Rotary Rig, including off-shore rig counts.
BHI's year end numbers showed slightly more than 1800 rotary rigs in North America, including 372 in Canada, and 60 in the Gulf of Mexico. BHI's International Rotary Rig count was just under 1000 with 720 land-based on 272 offshore. A general indicator of level of activity, rig counts are watched by energy service companies for a number of reasons.
- New rigs replace older, less productive rigs.
- New rigs incorporate the latest technologies and, of course, they find and tap into new reserves.
- New rigs are also an important indicator for suppliers of volume-related consumable products and services, which may be used up in the completion process and have to be replenished.
Oil field tools include drilling and extraction tools; completion tools; cementing tools; and logging and reservoir-mapping tools. Oil industry technologies range from the conventional—derricks, rotary tables, diesel motors and generators, pumps, and pipe—to today's innovations. They include multidirectional drilling, Logging While Drilling (LWD) and Measuring While Drilling (MWD), intervention technologies, and, increasingly, the specialized equipment and tools required for deepwater drilling.
The oil companies are challenged to recover hydrocarbons from increasingly remote and difficult locations, including drilling in mountains and in deep water, which Halliburton defines as drilling in water 1500' (457-m) deep or deeper. Five countries, including Brazil, the US (Gulf of Mexico), Norway, Angola, and Nigeria, form the volumetric core of worldwide deepwater activities. Global deepwater production is expected to reach a peak of about 9.3 million BOE/d in the 2008-2009 period, the company estimates.
"Energy service multinationals are being asked to develop the tools to go deeper, run hotter, and sustain more pressure in the search for oil resources; these hostile applications will create their own set of manufacturing challenges," says Kelly.
A continuing stream of sophisticated tools is being introduced to facilitate every aspect of drilling management.
- Sensors in "smart" tools can measure all the parameters needed to enable operators to make critical decisions in managing interventions in wells. The Sentio tool developed by Inteq at the heart of Baker Oil Tools' Smart Intervention technology contains an array of sensors that enables the measurement of weight or pull on tool, torque, rpm, bending stress, vibration, and pressure simultaneously at high rate of speed for analysis.
- Steerable rotary systems can investigate the lateral extent of an oil reservoir to obtain the finest quality logging while drilling (LWD) and wireline data for future drilling plans, such as the Schlumberger Power Drilling Services' system used by PlusPetrol on its San Martin field in Peru, which eliminates the need for pipe-conveyed logging.
Machine tool builders are developing increasingly larger machines to handle larger diameter workpieces as demands of the industry increase. "In the Middle East, they tend to use larger diameter equipment, for holes that are 24–36" [610–915-mm] bore holes. Typical holes in North America range from 5 to 12" [127–305-mm] diameter. The net result is that when they find larger reserves, they want to punch a larger hole for completion and production efficiencies and do it once and get it over to get at the oil," Kelly explains.
"Machine tool OEMs are building larger and more robust mill-turns, machines with 22" [560-mm] diam through-hole chucks, for machining heavy wall tubing and bar stock materials such as 4100 series steels and API grade casings, depending on the applications."
Oilfield-specific machining centers must include four-axis configurations, live spindles, and advanced mill-turn capability. These machines must also be able to handle the larger diameters over increasingly longer center-to-center ranges. Deflection and chatter issues that occur in these high-aspect-ratio millturn applications, combined with the requirement for deep-hole boring and internal profiling requirements, present an extra challenge to the machine tool OEM.
"You're talking 3, 4, and 5' [0.9, 1.2, 1.5-m] reaches with some very sophisticated profiles on the ID of tubing. In some cases, one has to make the tube out of solid bar stock by plunge-drilling and boring a hole because no tubing mandrel can handle the mechanics, and it can't be welded because of the temperature and pressure impact on the overall yield properties," Kelly says.
Oilfield machining extends to some of the more difficult-to-process metals, including Hastelloys, the Inconel alloys, proprietary engineered nickel chromium alloys, and Stellite. "Stellite is a metal that most machine operators dislike to run, but is a very good challenge for the manufacturing engineer and his tooling representative to collaborate on," says Kelly. In general, oilfield metals must be hardenable, durable, and corrosion-resistant to perform under the most difficult conditions.
According to Kelly, oilfield tool manufacturers must have the capacity or the supply base for a wide variety of processes to handle the multiple challenges that the tool operating environment presents. Some of the more common processes include:
- Surface treatments including thermal treatments with flame hardening, carburizing, nitriding, induction hardening, and other mechanical treatments for various applications required by larger diameters and high-pressure applications.
- Special coatings such as phosphates, e-nickels and other custom specifications for advanced corrosion-resistance treatments for sour-gas applications.
"The reality of the operating conditions is that a lot of these parts get locked down in deep-hole applications and are required to stay in service for a year or two without failure. For flow control, well stimulation, or maintenance they may have to be repositioned, get unlatched after running mud and some incredibly corrosive materials, be extracted, redressed, and put back down again as new," Kelly explains.
"These increasingly hostile environments will require newer, difficult-to-machine metals, larger, more-advanced machining centers and tooling, and will present continuous challenges for the design and manufacturing engineers, their suppliers, and the infrastructure that management decides to deploy as a result of their new strategy," Kelly says.
"As much as we can talk about the potential for wind, solar, hydroelectric, and even nuclear power, the reality remains; it is going to be a lot more difficult to find oil, and the demand is not going away any time soon," Kelly concludes.
This article was first published in the February 2008 edition of Manufacturing Engineering magazine.