Billy Pierce and David Nemetz at JDR argue that there’s no looking back for a US IWOCS market that has embraced leasing models.
The oil and gas sector is cyclical. Prices boom and bust, investment follows similar patterns. However, there is one trend that emerged from the downturn this time round that looks set to last: the traditional customer’s conversion to a leasing model for intervention workover control systems (IWOCS).
A renter’s world
The prolonged oil price downturn that began in 2014 was a watershed moment for operators in how they managed their budgets. Though rental models had always existed, standard procurement practice was to buy using capex budget. In the heady days of $120/bbl oil, that wasn’t a problem.
When forced to tighten belts though, operator, well control service companies and EPIC service providers found it harder to justify such large one-off expenses, even if a long-term ROI could be reasonably expected. Furthermore, ownership incurs risks: risk of damaged equipment, risk of being left with an expensive asset with not enough work to justify the cost. What was required was a model whereby the right solutions could still be acquired, but the upfront cost and risk were significantly lower.
Traditional IWOCS customers found such a model in OEMs (Original Equipment Manufacturers) willing to lease their solutions. By doing so, not only did they reduce initial investment and take on a share of the risk, they also allowed customers to keep capex dollars in their pockets. Crucially, this allows organisations to focus on their core competencies and now, with the oil price rebound, that capex is available to spend on projects such as greenfield exploration and other investments core to well control and EPIC service providers.
Most wells requiring intervention – around 80% globally – are in water less than 7-8,000 feet with pressures below 15,000 PSI. Such wells can be serviced by ready configured (or easily configurable) standard IWOCS, making them ideal for a rental market. Rather than buy a system and move it from well to well one after another, operators can easily rent as many as required, whenever required.
In fact, by the end of this year, approximately 9,000 wells globally will demand well intervention or abandonment services – a 63% increase since 2014. The industry is on track for a global rise of 20% between now and 2022. Rental models provide liquidity in the rapidly expanding workover and intervention market.
But what about that remaining 20% of wells that aren’t so straightforward? After all, interventions are called for when something is wrong or needs changing. It’s to be expected that not all instances are simple. These wells are typically in complex, very specific, ultra-deep and ultra-high-pressure environments. They require more complex equipment, precisely engineered and calibrated to the specific asset in question. It’s a much more expensive proposition and, though they can be recalibrated once work is complete, it’s much less economic than for simple IWOCS. If bought outright, operators can be left lumbered with an expensive asset designed for a very specific set of circumstances. In this scenario, an asset on the balance sheet can become a liability.
Rental is therefore an attractive proposition at this end of the market too. However, will OEMs want to share that risk? It’s certainly a more complicated business model than the more commoditised portion of the IWOCS market. With 30 potential wells drilled over the next two years that will require 20,000 PSI equipment, it’s a timely question.
These advantages of the rental model are globally applicable, but particularly pertinent to the US oil and gas sector, specifically the Gulf of Mexico.
According to the Bureau of Safety and Environmental Enforcement (BSEE), nearly one in five wells in the Gulf is shut-in awaiting intervention or plug and abandonment work. As a mature region, this is to be expected, with a lot of wells reaching the end of their originally planned lifecycle and ready to be either extended or retired.
What’s more, these are typically very deep, very high-pressure wells compared to other major producing regions. West Africa perhaps comes closest in terms of these characteristics, but wells are typically much younger.
Plus, where there are new wells being drilled in the Gulf of Mexico, they tend to be in parts of the continental shelf in even more extreme environments and these wells have only become economic due to recent advanced technology.
Taken together, those factors mark out the Gulf of Mexico as uniquely needful of advanced, precisely-engineered IWOCS and particularly suited to a leasing model that shares risk. There is more in rental’s favour though: there are business reasons too.
The Gulf of Mexico is in the midst of a flurry of M&A activity, with larger operators selling marginal assets to smaller counterparts. These smaller, more nimble companies have done their homework and established that, with the right intervention, they can extend asset life or ramp up production. Owing to their smaller stature, they are better placed to procure using opex via the rental market than try to purchase using capex.
Then, there is also the fact that the rental market offers speed and flexibility. In the Gulf of Mexico, the BSEE’s idle iron policy penalises owners of idle wells. If a well is left idle too long without either proper plug and abandonment or workover intervention, there are harsh financial consequences. As such, it is in the interest of operators to move quickly, which is precisely what the rental market enables.
Getting the right partner
Rental may be a way to share risk, but it doesn’t eliminate it outright. In fact, renting from the right partner – whether direct with the OEM or through a service company – is a major decider in a project’s success. Perhaps even more so than buying outright.
Operators simply don’t have the same depth and breadth of engineering expertise as they did before the downturn. They have very smart people, but ones which work at a higher level rather than the minutia of every relevant engineering discipline. With a lot of talent having left the industry and a looming, much-publicised talent gap, it’s more efficient for specialist talent to concentrate at the OEMs. This avoids operators duplicating efforts and reinventing the wheel for each challenging project. There is no longer the resource for that model.
So, it’s hugely important to work with an OEM with the level of expertise to handle the upfront design and calibration of the IWOCS to the specific project at hand. Of course, this applies whether renting or buying, however, when renting it’s important to consider the ongoing aspect.
High-end IWOCS are complicated, expensive systems which require experienced operators and may well call for fine-tuning and adjustment as the project progresses. If an operator buys outright, they are left to handle those items themselves. However, if renting, the operator has an open relationship with the OEM that has this expertise, which may even deploy the relevant talent to the project along with the equipment.
With such complicated projects, it’s vital to get things right. Not just for commercial reasons, but moral and environmental ones too. Particularly in the case of plug and abandonment – the only truly permanent intervention that an operator makes. At JDR we ensure the highest technical skill across our workforce to ensure this happens and our technical experts sit on boards such as the API to keep the industry moving forwards.
A well-stocked and well-used rental market is exactly the way to achieve these successes in the Gulf of Mexico – for both the 80% of simpler wells and the trickier 20%. But it won’t stop in the States. In this, as in many other things, the Gulf of Mexico will be a leader on a trend that will sweep the entire oil and gas sector in the coming years.