Future is Bright for US Energy Production
Production improvements and innovations will help the US keep pace with the world’s hunger for energy.
By James Crompton
Industry Research Analyst
New York, New York
The US is one of the world’s largest producers and consumers of energy, and this trend is expected to continue over the five years, to 2019. Improving technologies and techniques have enabled both oil & gas extractors and mining companies of all types to improve their operational efficiencies; consequently, manufacturers of machinery and equipment for these sectors have increasingly been experiencing strong demand for their products. Hydraulic fracturing and horizontal drilling techniques have vast untapped natural gas resources in the US, and mining equipment has become more automated and efficient. As such, IBISWorld expects the Mining, Oil & Gas Machinery Manufacturing industry (IBISWorld report 33313) to grow at an annualized rate of 1.4% and total an estimated $31.3 billion in the five years to 2019.
Oil & Gas Developments
The evolution of oil & gas machinery and equipment in the past five years has included a substantial expansion of hydraulic fracturing and horizontal drilling technology. Both hydraulic fracturing and horizontal drilling have been around for decades, but improvements in technology have made these techniques more commercially viable and effective. Upstream oil & gas companies use these techniques to access natural gas resources in low-permeable shale rock deposits, and these upstream operators have been gradually demanding high value-added machinery and equipment to minimize costs and maximize well productivity. IBISWorld expects that oil & gas field machinery, rotary oil & gas field drilling machinery and other oil & gas field drilling machinery will account for an estimated 71.4% of the Mining, Oil & Gas Machinery Manufacturing industry’s revenue. This high level of industry share is expected to persist in the five years to 2019.
International trade also plays an important role for manufacturers of oil & gas extraction technology. IBISWorld anticipates that exports will account for an estimated 42.4% of industry revenue in 2014, and this percentage is expected to decline only marginally in the five years to 2019. Countries such as Canada, which are expected to constitute an estimated 6.2% of total exports, demand high-quality machinery to extract unconventional resources, such as those located in Alberta’s Athabasca Wabiskaw oil sands. These large deposits in Alberta contain the vast majority of Canada’s oil reserves, and this region is expected to demand the greatest majority of US exports to Canada. Companies that operate in this region use machinery to perform in-situ extraction techniques, which entails injecting steam into underground deposits to soften bitumen and pump the resource to the surface. Steam-assisted gravity drainage and cyclic steam stimulation are the two most popular in-situ extraction techniques, and both require high-quality pump and steaming machinery, as well as tubular goods to extract unconventional resources. IBISWorld expects that this type of machinery will expand its share of industry revenue in the five years to 2019, as more companies seek unconventional resource development.
In the US, hydraulic fracturing and horizontal drilling equipment have been in high demand from upstream gas producers. These techniques are closely related, and companies that provide hydraulic fracturing and horizontal drilling solutions have been experiencing elevated demand for their services and products. The Energy Information Administration (EIA) expects that shale natural gas will grow from 16.0% of total supply in 2009 to an estimated 49.0% of total supply in 2035. Hydraulic fracturing is the process of tapping into low permeable shale deposits, and it is one of many steps in the extraction process. Machinery manufacturers can supply machinery at every point in the extraction process, including machinery for drilling, casing and the completion of wells. Shale deposits are typically located at depths of 6000' (1830 m) or more below the surface, and are typically thin depending on their location. Consequently, horizontal drilling enables upstream operators to drill along the shale deposit, allowing them to access a large area of resources from a single well pad.
Upstream oil & gas producers also demand high-quality oil country tubular goods (OCTG), which consist of drill pipes, casing and tubing products. These products must be able to withstand high levels of pressure and be resistant to the corrosive characteristics of extracted products. Increasing hydraulic fracturing, horizontal drilling and in-situ extraction usage has spurred demand in this product segment, and IBISWorld expects this trend to persist in the five years to 2019. Upstream oil & gas extractors are expected to continue demanding high quality OCTGs, and manufacturers of these goods are projected to benefit from such elevated demand in the next five years.
While regulatory hurdles are anticipated to continue over the five years to 2019, IBISWorld expects technology to adapt to increasing regulatory oversight and environmental requirements. The process of cementing and casing is essential in oil & gas production, and IBISWorld expects technology in this segment to become a primary focus moving forward. When a well is being drilled, whether horizontally or traditionally, the drill operator incrementally cements the annulus, which is the space between a steel casing and the surrounding geological formation, to isolate the surrounding area from the extraction process. Increasing attention on the environmental impact of hydraulic fracturing and horizontal drilling is expected to encourage further development of the casing and cementing process; therefore, IBISWorld expects that this segment of machinery could experience a period of increased innovation during the five years to 2019.
Recovering Energy Markets
The Mining, Oil & Gas Machinery Manufacturing industry supplies a variety of mining industries with necessary equipment for cost-effective mineral extraction. Environmental concerns regarding coal usage have only partially offset steady demand in the mining sector, and while these concerns are expected to persist in the five years to 2019, the US is still expected to rely on diverse sources of energy. Additionally, the 2011 accident at Japan’s Fukushima Daiichi nuclear power station has garnered significant attention from the nuclear power sector in the US. However, IBISWorld expects that the impact of this event will not significantly offset demand for uranium mining operations in the United States over the five years to 2019.
The EIA anticipates that both nuclear and coal power generation will maintain their relative shares of energy consumption in the United States until 2040. Coal, for instance, sustains one of the highest levels of energy return on
investment (EROI). EROI is the ratio of acquired usable energy from a particular source to the amount of energy required to produce this energy. Coal’s high EROI is expected to maintain this elevated level, especially as energy providers improve their systems to minimize the environmental impact of burning thermal coal. Likewise, uranium also maintains high EROI levels, which is expected to help support demand for uranium mining operations. While these commodities can impact the environment, the energy they provide is projected to remain essential to the US energy sector.
One of the primary factors influencing the Coal Mining industry (IBISWorld report 21211) is the increase in domestic natural gas production. However, the US continues to operate with excess electricity generating capacity, as the negative impacts of the recession have yet to be fully reversed. Combined with high levels of natural gas production, this excess capacity has placed pressure on the price of natural gas. Furthermore, the increasing environmental focus on coal-powered electricity generation is expected to cause natural gas to account for a larger share of total energy consumption. According to the EIA, natural gas is expected to account for 30% of primary energy consumption in the United States in 2040, up from 27% in 2012. This increase is expected to come at the expense of petroleum product energy consumption.
Nevertheless, coal is expected to constitute a major role in global energy markets over the five years to 2019. IBISWorld expects that mining machinery manufacturers will continue to offer high value-added products to mining companies during the next five years, especially as environmental concerns weigh on downstream sectors. The high cost of mining operations ensures that demand for improving machinery technology will remain elevated over this period. While the Coal Mining industry is not expected to reach prerecession revenue levels, demand for mining machinery will continue to be strong as mining companies continue to seek ways to lower the high costs of extraction.
Fukushima Daiichi and Uranium Mining
Safety is of paramount importance in nuclear power generation, and the events that took place at Japan’s Fukushima Daiichi plant in 2011 brought this issue into the global spotlight. In response to this disaster, the US Nuclear Regulatory Commission (NRC) identified several tiers of requirements, ranging from Tier 1 (highest priority) to Tier 3 (pending the outcome of Tier 1 implementations). Tier 1 requirements include immediate safety enhancements to nuclear plants. Additionally, the nuclear industry has implemented a flexible response strategy known as “FLEX.” This strategy is intended to equip nuclear plants with diversely located equipment to ensure flexibility in the case of an emergency. Additionally, the nuclear energy industry has been developing regional critical equipment centers that would be capable of delivering supplemental emergency equipment to any nuclear energy facility in the United States within 24 hours. These additional measures are expected to bolster the security of nuclear power generation plants in the US, and NRC’s State-of-the-Art Reactor Consequence Analyses report, released in February 2012, determined that the public would be effectively protected in similar situation.
While the Fukushima Daiichi incident illuminated the downsides to nuclear power generation, uranium miners in the US are expected to perform strongly over the five years to 2019. Nuclear power plants, the consumers of uranium, purchase uranium through long-term contracts and only rarely on the spot market. Due to these long-term purchasing contracts, the producers’ stockpiles fulfill most purchases rather than recently mined uranium, which helps producers and consumers line up long-term plans. Additionally, the government sold off stockpiles of uranium in the 1990s and early 2000s, which depressed the price of uranium. As government stockpiles exit the market, the world price of uranium is expected to increase.
IBISWorld forecasts the world price of uranium to increase at an annualized rate of 12.5% in the five years to 2019. This expected increase in the world price of uranium is anticipated to bolster uranium-mining operations in the next five years. Consequently, machinery for these miners is expected to be in high demand as well. Uranium mining operations typically rely on either underground mines or in-situ recovery techniques, and production has been increasing over the past five years. The EIA projects that total uranium production in 2013 reached its highest level since 1997 (latest data available). Furthermore, uranium production in 2013 is expected to be 20.5% higher than production in 2011. If uranium miners were negatively impacted by the Fukushima Daiichi nuclear disaster, it is unlikely that production would have increased at such a high rate. Nonetheless, health concerns for employees working at these sites are expected to persist. As a result, mining machinery manufacturers are expected to continue offering solutions to minimize both costs and worker exposure to hazardous gases released in the mining process.
For a more detailed look at the state of nuclear power plant use and construction in the US, please turn to “Rays of Hope, Clouds of Doubt” on page 17.
IBISWorld projects that the Mining, Oil & Gas Machinery Manufacturing industry is poised for a period of strong demand and performance. Downstream extraction sectors are expected to sustain high levels of demand, and improving technology will bolster industry performance over the five years to 2019. Furthermore, strong market conditions are expected to encourage entry into the market, with the number of industry operators increasing at an annualized rate of 0.8% from 2014 to 2019.
As demand for energy products continues to recover from the recession’s negative impact, IBISWorld expects the world price of natural gas to increase. This projected increase will boost purchasing costs for utilities companies, and IBISWorld expects alternative sources of energy, such as nuclear power, to benefit from this trend. As such, uranium mining operations will continue to perform strongly, thus improving demand for high value-added machinery and equipment. Additionally, coal is expected to continue maintaining high levels of energy efficiency, which will also likely benefit mining machinery manufacturers.
James Crompton holds a degree in Economics and International Relations from Boston University. A native of Baltimore, he previously worked in Shanghai, China, researching offshore financial centers. Crompton covers the oil & gas, mining, 3D printing and entertainment industries for IBISWorld.
This article was first published in the 2014 edition of the Energy Manufacturing Yearbook.
Published Date : 6/4/2014