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MARKET REPORT: OIL & GAS PUMP SALES

MARKETFORECAST

Pump sales to the oil and gas industry set to increase regardless of oil prices

Robert McIlvaine, the President & Founder of the McIlvaine Company investigates why pump sales in the oil and gas industry have recently grown at rates exceeding more than seven percent per year.

By Robert McIlvaine, President & Founder, McIlvaine Company

Growth will slow in the next fi ve years. The rate is likely to be between three and six percent increase per year based on a number of factors. They include:

  Health of the world economy  Price of oil  Unconventional vs. conventional extraction

  Comparative cost of various unconventional extraction methods

  Politics and the environment

The choice of pump type is based on the extraction method. The pump requirements differ based on the following parameters:

  Volume per pump  Corrosive nature of the fl uid  Solids handling  Gravity  Temperature  Well bore deviation

McIlvaine segments the pump market into centrifugal, reciprocating, rotary, and diaphragm segments. The largest single application is in “artifi cial lift”. Where the pressure of the fl uid being extracted is insuffi cient, pumps are used to provide the lift power. Reciprocating pumps in use include rod pumps, hydraulic piston pumps, and other progressive cavity pumps. Electric submersible pumps are the largest sub-segment of centrifugal pumps in use for artifi cial lift and account for 50 percent of total centrifugal pump revenues in the oil and gas sector. There is an option for using pumps in “gas lift” (see Figure 1), but this requires an expenditure for gas.

McIlvaine has projected pump sales of $13 billion USD for oil and gas applications in 2019 based on mid-range forecasts between the three to six percent potential growth rate (see Table 1).

in part to be able to expand vertically. It recently announced a $60 million USD expansion of the Lufkin foundry to improve its competitive position in the manufacture of artifi cial lift and other pumps.

Health of the world economyPump revenues are a function of oil and gas consumption, which in turn is a function of the health of the economy. The US is expected to experience over four percent growth in 2015. The longer term forecast is also positive. India and China GDP will likely grow at greater than six percent on average, with China on a slightly sinking slope and India on a rising slope. Europe is not likely to reach a two percent annualized growth in the next fi ve years. Many of the EU member companies are anticipating less than one percent growth in 2015. Russia and many Middle East countries have major problems due to the fallen oil prices.

Price of oil and the effect on the pump marketThe pump revenues are a function of quantity of oil pumped and not of the oil revenues. Another aspect is the relative value of the dollar against the yen, euro, and other currencies. Oil prices are tracked in US dollars. When the dollar rises against other international currencies, then oil prices fall. You can exchange dollars for more euros and buy more oil. Oil consumption is a function of price, so lower oil prices result in greater consumption, which attributes to a longer term benefi t to the pump industry.

Table 1: Projected world pump revenues for 2019 for oil and gas applications in $ millions.

PUMP TYPE YEAR 2019

Centrifugal 7200

Diaphragm 600

Reciproca ng 4500

Rotary 800

TOTAL 13100

The defi nition of revenues by McIlvaine includes the replacement parts and services supplied by the pump supplier. Components sold by third parties are not included. Also, non-pump components of pumping systems are excluded. The artifi cial lift market alone, using a broader defi nition, is over $12 billion USD per year. Pump revenues do not necessarily refl ect value added by the pump supplier. Castings and forgings comprise a signifi cant percentage of total pump cost. Many pump suppliers do not own foundries or forge shops. Nearly all pump suppliers buy some castings and forgings. GE purchased Lufkin Industries

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MARKET REPORT: OIL & GAS PUMP SALES

In the short-term, lower oil prices discourage developers of unconventional sources. At prices below $70 USD/barrel, some of the shale oil reserves become uneconomical to exploit. However, even at $60 USD/barrel of oil, there is profi t to be made from the more lucrative oil shale reserves.

Conventional versus non-conventional extractionThe price of Saudi Arabian oil is arbitrary. The cost of extraction is nominal. One scenario is that the Saudi government reduces prices to the point at which unconventional oil becomes uneconomic. The pump revenue per barrel of conventionally extracted oil versus the unconventional extraction is substantially lower. So, the greater use of conventionally extracted oil will be a negative factor on the pump market.

There is one caveat here. GE estimates that 94 percent of the oil wells in the world will need artifi cial lift technology. GE purchased Lufkin for over $3 billion USD in 2013 based on high growth in the artifi cial lift sector. So, whether it is conventional or unconventional, there is growth anticipated for artifi cial lift.

Comparative cost of various unconventional extraction methodsThe pump revenue per unit of oil extracted varies considerably between the various unconventional extraction processes. Furthermore, the type of pump required also differs. Subsea extraction has generated a huge market for electric submersible pumps (ESPs). The high pressures and solids encountered in hydraulic fracturing create some unique conditions which has allowed the majority of this market to be captured by a handful of companies. Canadian tar sands extraction involves use of large numbers of slurry handling centrifugal pumps, for example.

One of the biggest variables is the role to be played by coal gasifi cation and liquefaction. China is moving ahead with both indirect and direct conversion of coal to vehicle fuels. Direct liquefaction requires more pump investment per unit of oil produced than any other production method. China is embarked on a program to convert 800 million tons of coal annually to chemicals and liquid fuels. Another 700 million tons will be converted to pipeline gas. This gas will be delivered to cities across the country which presently burn coal

for heating purposes. This initiative is one of the primary routes to reduce the smog problem.

Direct liquefaction involves hydrogenating coal slurries and separating impurities. Indirect liquefaction involves several steps. The fi rst step is gasifi cation. Then, gas to liquids technology is employed. The fi rst large scale direct liquefaction plant is in operation in China. It is benefi ting from low raw coal prices. As a result, it is estimated to be more than competitive with oil at $60 USD/barrel. Indirect liquefaction is more expensive. The break-even point is possibly $10 USD/ barrel higher than the direct process.

There is much more experience with indirect liquefaction. Hundreds of plants are making chemicals using this process. The pioneer in the US has been Eastman Chemicals (See Figure 2). The direct liquefaction process has been diffi cult to develop. The Chinese have benefi ted from the billions of dollars spent to develop this process by the US. A large research and development program was undertaken in the mid-1970’s during the oil embargo. When this embargo was lifted, the program was discontinued. China has been the benefi ciary of this work.

How politics and the environment affect pumpsThis is the trump factor which can affect all the other parameters. The Chinese program for direct liquefaction will be shaped by political and environmental aspects. Instead of relying on imports, China can use coal to make its own liquid fuels. The political benefi ts are obvious. The downside is the negative image of the additional greenhouse gases generated by such a program. However, the Chinese citizens are more concerned about smog today in their country than global warming impacts decades from now.

The mix between conventional and unconventional oil will be shaped

Figure 1: Electric submersible pumps are the largest sub-segment of centrifugal pumps in use for artificial lift and account for 50 percent of total centrifugal pump revenues in the oil and gas sector. There is an option for using pumps in “gas lift”, but this requires an expenditure for gas.

Photo Credit: Dover

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MARKET REPORT: OIL & GAS PUMP SALES

by the OPEC (Organization of the Petroleum Exporting Countries) politics. Many of these countries need high oil prices to fund present government programs. Saudi Arabia is the least vulnerable. But it, too, would have to reduce expenditures or risk depletion of currency reserves. The oil embargo in the 1970’s was effective because the alternative oil sources required large capital investments (oil shale and coal liquefaction). Projects could not be started and stopped without exorbitant expenditures. Today there is minimal investment to increase shale oil drilling and extraction. So, OPEC realizes that as soon as prices return to high levels there will be shale competition.

Sales of pumps to the oil and gas industry will increase irrespective of oil prices. One reason is that

ABOUT THE AUTHOR: Robert McIlvaineRobert McIlvaine is the President and Founder of the McIlvaine Company, which publishes reports across worldwide pump and valve markets. He was a pollu on control company execu ve prior to 1974, when he founded the McIlvaine Company. He oversees a staff of 30 people in the United States and China.

All forecasts are extracted from Pumps: World Markets published by the McIlvaine Company www.mcilvainecompany.com

Robert McIlvaine, President & Founder, McIlvaine Company

existing wells will need pumps for artifi cial lift. Subsea, tar sands, and coal liquefaction all require pump investments signifi cantly greater than that needed for conventional extraction. A variety of pumps are needed for the various offshore and onshore applications. Centrifugal pumps will comprise the majority of the choices.

Figure 2: There is much more experience with indirect liquefaction than direct liquefaction. Hundreds of plants are making chemicals using this process. Eastman Chemical Company has been a pioneer in the US.

April 16-18, 2015Congresium Ankara / Turkey

www.ifat-eurasia.com

Organization

MMI Eurasia Fuarcılık

Trade Fair for

Environmental

Technologies

THIS FAIR IS ORGANIZED WITH THE AUDIT OF TOBB(THE UNION OF CHAMBERS AND COMMODITY EXCHANGES

OF TURKEY) IN ACCORDANCE WITH THE LAW NO.5174

Supported by

Photo Credit: EastmanChemical Company