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By Joanne Goh, IHS Markit
The global oil & gas industry has experienced weak demand, high inventory and low oil prices since 2015. Several major oil companies have delayed or cancelled projects, leading to a drop in capital expenditure (CapEx). Equipment vendors have suffered the most, especially pump and compressor manufacturers.
In 2016, CapEx for oil & gas was $541 billion, down 12% from 2015. CapEx for the refining and petrochemical industries was $111 billion, down 3% from 2015.
Despite a significant recovery of oil prices from their low point in January 2016 (Brent price: $28/barrel) to the August 2017 level (Brent price: $52/barrel), OPEC is unlikely to achieve its price objective of a sustained level at $60/barrel in 2017 or 2018.
Diminished expectations are due to the continued resilience of U.S. upstream activity at lower prices and the reluctance of OPEC and Russia to reduce crude oil production and surrender market share.
China leads in oil demand
From 2017 through 2020, oil demand will remain strongest in China. Over that same period, North American demand will fall, while European demand will languish near zero.
Figure 2 offers a snapshot of CapEx spending in each industry, showing the importance of the oil and gas industry in three major regions — Europe, the Middle East and Africa (EMEA) and the Americas. With the gradual recovery in oil prices since the beginning of 2017, IHS Markit expects onshore activity to recover first, with spending starting to increase again in 2017.
Compared with the onshore market, the equipment for offshore applications reacted more slowly to the downturn. The downstream market will also recover more slowly than upstream applications.
IHS Markit projects the air and gas compressor market in the oil and gas industry to be worth $8.9 billion in 2017, a slight recovery from 2016 levels ($8.8 billion). The centrifugal pump market, though, is expected to remain below $3.0 billion.
Clearly, gas compressor suppliers are more exposed to this downturn. However, pump and compressor suppliers that can tailor their products to the sectors that benefit from lower oil prices can broaden their customer base and increase marketshare.
Equipment market demand
Pumps and compressors used in different oil and gas applications are closely tied to market demand from each sub-sector. Therefore, it is important to understand the market performance in each of the onshore, midstream and downstream sub-sectors.
The Middle East in 2016 was one of the most resilient regions in terms of onshore demand, with a relatively modest 1% drop in its rig count. Demand for onshore drilling rigs in this region remains steady in 2017, because of low project breakeven prices.
Moreover, larger companies are maintaining their long-term investment plans despite current output reductions (announced by OPEC towards the end of 2016). In this region, excess oil and gas output can be easily transferred to storage facilities until it is in demand.
In midstream processes, major pipelines within the U.S., and those linking the U.S. to Mexico, as well as pipelines linking Russia and the Caspian region to Asia and Europe, account for most of the demand.
Politics continues to play an important role in pipeline development, such as the TurkStream gas pipeline project between Russia and Turkey. It was suspended in 2015 after Turkish forces shot down a Russian warplane near the Syrian border.
Present threats to pipeline demand will continue to be political and regulatory, such as protests and legal battles in the U.S. over the Dakota Access and Keystone pipeline projects. Global demand for pipelines is forecast to increase with a growth rate of 6% per year from 2017 to 2020.
On the other hand, compressor and pump markets for downstream applications have been performing well since the oil price collapse. This is driven mainly by a shifting industry focus away from long-term investment toward steady cash flow.
When oil prices are high, companies focus on exploration and production. But they tend to shift toward efficiency and cost reduction when navigating in a financially restricted environment.
Some larger companies have reduced exploration and upstream activities. They are now more concerned with downstream markets, on restructuring operations and upgrading existing equipment into more energy-efficient systems. This will provide additional growth opportunities for the sale and maintenance of pumps and compressors.
The future looks promising
Upstream and midstream pump and compressor markets are expected to see growth in the coming year. All sectors — upstream, midstream and downstream — will see a healthier market at least through 2021.
The rapid adoption of Internet of Things (IoT)-based solutions and technologies offer oil and gas companies the chance to automate high-cost, dangerous, or error-prone tasks.
Most oil and gas companies are adopting big data, analytics, IoT sensors and modern control systems. They would do well to accelerate their efforts. According to recent interviews with end-users and suppliers, pump and compressor companies that offer fully integrated solutions will benefit most from this period of transition.
Predictive maintenance is more valuable than the reactive stance typified by preventive maintenance. In the latter case, costs are higher due to the process of performing routine monitoring and replacement of non-faulty equipment. In addition, facilities sticking to traditional maintenance practices tend to retain higher inventory levels.
Eventually, the goal is to apply advanced analytics to arrive at prescriptive maintenance. This involves adjusting equipment performance to fit into a service program, thus extending its life.
As a result, pump and compressor vendors are being pushed more than ever to become complete solution providers. They are now expected to engage with customers along the whole supply chain.
While many initiatives have been put in place to monitor and regulate pump and compressor efficiency, the real way that suppliers can appeal to users is by guaranteeing more uptime.
Efficiency savings are a great incentive, but the ability to monitor and reduce downtime is paramount.
However, vendors struggle to make a profit. Many OEMs are selling pumps and compressors at prices 10% lower than before the downturn happened. The focus of these suppliers, therefore, is to maintain and grow market share via ancillary business offerings.