Rolls-Royce and Electrical Submersible Pumps (ESP) ?
Electrical Submersible Pumps (ESP) are one of the most reliable and efficient ways to lift reservoir fluids (both oil and water) to the surface. As the name suggests, it is submerged into the reservoir fluids ( in a well) and pushes the fluid to the surface. ESP pumps can be designed to handle fluids of up to 60,000 b/d and cover various well conditions and production profiles, and generally a low-cost solution for high volumes of lifting. ESP systems are very susceptible to failures caused by 1) Sand 2) Electric spike 3) Frequent on/off of the pumps/motors 4) High down-hole temperatures. On average, a down-hole pump itself have higher failure rates, followed by motors and cables, which all part of the ESP system.
A top-down pricing policy is very common in this the ESP business - when pricing the ESP system, manufacturers would always consider what are the lost production opportunities and costs of ESP change for operators. Generally, operators are willing to pay more for the ESP system, if it guarantees certain performance levels. E.g. changing a $ 500K ESP system requires an average of 3-8 days of lost production and daily rig / well intervention rates. This could be translated into millions of dollars of costs for operators, depending on the production rates and well intervention costs (especially offshore). Is there the best approach in solving this?
Historically, operators purchased ESPs and never looked into other options. However, a new approach of “leasing” became popular in many parts of the world and proved to be fairly successful. The problem with this strategy is ESP running boundaries and operators willingness to shut down a well, if an ESP is about to fail (based on monitoring). Operators are reluctant to kill production just because a service company considers that the ESP will fail in a few days/hours - the cost of the ESP is extremely small compared to lost revenue as a result of that shutdown. Reason being, ESP owners would want to extend the life of the ESP system by avoiding significant failures and breakdowns through preventive maintenance.
Will operators listen? How the right balance can be achieved and objectives aligned? Well, the airlines' industry and Rolls-Royce can help.
Power-by-the-hour is the concept originated in the aviation industry by Rolls-Royce whereby commercial airlines would pay for every hour a jet engine worked (aka operating lease). Yes, this is how it works - jet engines generally owned by manufacturers (OEM) and those OEMs take care of servicing and repairs and guarantee performance at all times. It has been a common practice for almost 20 years. There are a number of benefits for both, the airlines and OEMs, namely:
- Less CAPEX for plane owners
- Less OPEX ( workshops and engineers)
- Visibility on costs- fixed fees
- New technology available all the times
For engine manufacturers
- OEM get access to engine performance data at all times
- OEM can spread the costs of inventory, workshops and engineers over many customers
- Closed relationship with clients
- Sustained revenue streams
Can the same principle be applied in the ESP business? Yes, it can and it is not that complex. This what needs to be done in order to apply it:
- Agree a guaranteed period of the ESP system run life with risk/reward mechanism that would provide an incentive to ESP owners to design the optimum system. Under these arrangements, all monitoring and maintenance will be done by ESP owners, for a monthly fee, that may be complemented with an upfront lump sum.
- Introducing asymmetric rewards, whereby reward is higher than punishment, will ensure that there is a great incentive for ESP owners to achieve the highest possible run life, but in the same time enough “stick” not to take unjustifiable risks.
- The solid contractual relationship between parties is vital. A contract shall clearly define roles and responsibilities, boundaries of the ESP system performance and its out-of-spec operation and its consequences must be agreed in advance, to avoid disputes and claims. E.g. If the ESP owner recommends to stop production and replace a part, but the operator is not willing to follow, then risks associated with the ESP failure shall be borne by the operator.
- Providing the most accurate data and expected reservoir behaviour for the design stage is crucial and beneficial to both, operators and service providers.
As an example, assume the agreed run life for your ESP system is 100 hours. If the system works 140 hrs. a contractor earns a bonus of 8%, whereas if the system underperforms and runs only 90 days, the contractor is penalized by 2%. Those numbers should be developed based on what brings value to both parties, i.e. paying a large bonus for extra run days that are not economical to the operator, does not make sense.