Directional drilling in the Oil & Gas industry is a technique used to drill deviated and/or horizontal wells, as well as wells with multiple angles. In addition, directional drilling allows drilling multilateral wells from the same horizontal wellbore, reach multiple targets, as well as drill multiple wells from the same location, which in turn saves time and cost, compared to the standard way of accessing an oil reservoir. With “easy oil” being in the past, drilling into reservoir sections become more and more challenging and complex. Tremendous improvements in the technology behind directional drilling allow the industry to geo-steer a well in real-time and achieve very high inclination and angles.
Directional drilling services are divided into two distinctive "technologies" - Rotary Steerable Systems (RSS) and Down-hole Motors.
A Rotary Steerable System (RSS) is a technology employed when drilling directional wells, both onshore and offshore. Today, RSS systems became very sophisticated and able to drill high angle inclination and long horizontal wells. Using measurement while drilling (MWD) technology, engineers on the surface can change the angles and direction of the wellbore, by steering ( geosteering) the well using the RSS system. RSS systems use the rotation of the drill pipe, with geo-steering achieved using 1) pushing-the-bit and 2) pointing-the-bit. When a drill bit is pushed (push-the-bit) in order to achieve well inclination, side forces ( hydraulic or mechanical) are applied to the bit and pushed against the borehole, hence pushing the bit in the opposite direction of the force. In the Point-the-bit approach, a bent-housing or a shaft inside the body of the RSS system is used to change the direction, whereby the front part ( face) of the RSS system changes its orientation against the axis of the drill string.
All RSS systems use continuous rotation from the drilling rig equipment on the surface. This continuous rotation of the drill string also improves the transportation of drill cuttings, generated as a result of "cutting" the earth when drilling. In addition, it provides superior formation evaluation data, as the walls of the well are smoother, as a result of a more balanced well trajectory. RSS systems can also be run below down-hole motors to have better performance. Some directional wells are very challenging or even impossible to drill without having the RSS system.
Down-hole Motors / steerable motor assemblies (positive-displacement motors (PDM). When steerable motor assemblies are used, the power to the bit is provided by a mud-motor (positive displacement motor) and assembly of deviation tools, such as bent sub or bent housing. Steering is achieved by using a similar approach as with the point-the-bit system, whereby a drill bit changes its orientation against the axis of the drill string. Motors have very little surface rotation with the drill string; as such chances of down-hole problems are higher when it comes to sticking and transport and removal of drill cuttings.
Generally, RSS is used in geological formations where precise directional control is required. A motor (high-performance mud motor) can be used in less complex formations, providing a better overall cost of drilling. A combination of both may exist in certain applications.
Quick Facts about two major directional drilling technologies
The majority of equipment used in directional drilling services is patented to major service providers. The fundamentals of the technology are mainly around 1) how to achieve inclination and control of the drill bit and bottom-hole-assembly (BHA) and 2) acquire data in real-time data and send it to the surface. While the basic technology behind the tools is similar, the superiority of one over the other depends on the application and environment. Modern days, directional drilling tools allow to navigate and geo-steer a well, using real-time data and sophisticated visualization techniques, as down-hole data is acquired in almost real-time.
Directional drilling tools are also required to collect information and get it to the surface, to understand what is happening subsurface, as the well is being drilled. Major families of equipment, based on various logging and measuring principles, are Logging-While- Drilling (LWD), Measurements-while-drilling (MWD) and Formation evaluation while drilling. A very high-end and precise technology used to collect and analyze data, which is then used for Reservoir, Petrophysics, Geology, Geomechanics, Geophysics and Reservoir Engineering. The data is also used for well placement, positioning, and anti-collision applications, where multiple wells are drilled in close proximity to each other. Depending on the well type, there may be only MWD or a combination of MWD, LWD, and others used as a full suite of tools. For example, drilling an injector well, costly LWD tools may not be required, as there is no reservoir data to be collected and analyzed. Yet, there might be cases where this LWD may be required for continuous reservoir study and monitoring.
On average, Directional Drilling services represent between 5 to 15% of a well cost. Due to increased complexity in drilling, the services become more critical to operators, as such switching costs and learning curve costs could be very high.
Risks & Opportunities
Risks & Opportunities
- A new commercial approach has been gaining traction in the category, whereby equipment is sold directly to operators, with maintenance agreements in place. This strategy has been proved to be successful in lower-tier markets
- Monitor suppliers and its moves in the market and technologies available to help to move more volumes into the lower-tier segment, where the Buyer power is stronger
- Globally, the utilization of RSS systems is increasing and it proved to be a more reliable and efficient technological approach than Motors, primarily as a result of superior control of the well trajectory that RSS technology provides. A hybrid technology of motorized RSS that provides even better performance has been used more frequently in the GCC, over the last several years.
- With tremendous progress made over the last 10-15 years in directional drilling technology around the integration of sensors, battery capabilities and steering/inclination tools, efficiency and capability of directional drilling equipment increased significantly. With such a pace, in the nearest future, remote drilling and geo-steering will be a norm, whereby one person will be able to control multiple rig operations from a single location
- Limited buyer power and higher supply risk for equipment components manufactured by suppliers in other industries, such as medical, military, aviation and electronics (2nd tier suppliers). These industries are known to be more accurate with demand planning when compared to the Oil & Gas sector, hence 2nd tier suppliers prefer to allocate their manufacturing capacity to those industries.
Supply & Demand Dynamics
Supply & Demand Dynamics
The demand for directional drilling services has been growing constantly, primarily as a result of its benefits that allow operators to access more hydrocarbons. In the long term, demand is expected to grow. Regions outside of the Middle East have the greatest impact on demand growth. North America and Asia-pacific are the highest spend areas for the directional drilling segment. Complex geological structures and shale are key drivers, with the Middle East being the smallest market for directional drilling services.
The complexity of equipment, services and value that it adds to operators and service companies is significantly higher in the Middle East than in many other places. A number of new technologies in directional drilling services have their roots in the Middle East. Up until now, between 70%-80% of directional wells in the Middle East are drilled onshore, predominately in Saudi Arabia and Oman. Around 80% of new wells drilled are horizontal. In addition, in the Middle East, high technology directional drilling services ( high-tier segment) are mainly limited to offshore projects, with less advanced equipment ( lower-tier segment) being used substantially while drilling onshore.
The supply of directional drilling services is limited to major service providers, although there are smaller and niche companies available. From the technology and complexity standpoint, Schlumberger, Baker Hughes, Halliburton, and Weatherford are the top 4 service companies, controlling more than 70% of the market, with Schlumberger being the global leader.
Historically, this segment has been dominated by Schlumberger. This includes all the services associated with directional drilling, such as LWD/MWD services and Motors. There are smaller companies in the market, who provide the services. However, the majority of their applications are limited to certain tools, e.g. mud motors, gyro ( lower-tier market).
Below is an approximate breakdown of the market share for Directional Drilling Services between the major contractors and suppliers. (adapted from Spears and Associates )
This is a Strategic category with a highly complex market structure. With limited competition in the higher-tier segment and virtually no room for new players to break the market, and buyers' reliance on the service company's expertise, power balance lies with suppliers and represents a high risk to operators. Yet, the lower-tier segment represents a great opportunity for developing domestic companies.
Portfolio positioning is essential in guiding strategy within the category. The category is positioned based upon three factors; 1) supply risk, 2) profit/value risk, and 3) power structure. Based upon a detailed analysis the sub-category is positioned as a Strategic
- Medium to High Supply Risk is supported by:
- Extremely limited competition in the high-tier segment
- High entry barriers and R&D intensive
- Quality and reliability are the issues
- High profit/value risk is determined by:
- High levels of expenditure
- High-value generation for future production and reservoir management
- Power is strongly favoured towards the Seller (See External Scanning section), although the lower-tier segment exhibits a power shift toward Buyers.
Cost & Price Analysis
Cost & Price Analysis
The 2015-2018 downturn resulted in continuous downsizing in the manufacturing capacity of the entire supply chain for tools and equipment. Coupled with tool fleet replenishment, tool availability is becoming a serious issue for many. Yet, the situation changed in 2020, due to the COVID pandemic.
This category is highly known for market share battles between various service providers. What is also evident in this category is irrational bidding. Service companies may, especially bigger integrated companies, provide lower or breakeven pricing, in order to protect their market share or a particular client.
Due to substantially reduced demand, prices for directional drilling services witnessed a significant reduction in 2020 and 2021. It is yet unclear as to when the market will recover, but Q3 2021 may see some signs of recovery.
The breakdown of the average cost distribution of directional drilling is shown below. As seen, the equipment part is the highest cost element. Due to a number of reasons, the cost structure of directional drilling services is highly complex.
Below is an overview of the cost basis and drivers.
- Manufacturing & assembly costs. This category is very high precision and high-quality area, which require a significant amount of highly qualified & trained personnel. Manufacturing processes and practices could be compared to those of the space industry and require a very detailed QA/QC process to ensure tools reliability.
- Research & development costs. Manufacturers and service companies spend a significant amount of capital on R&D to be competitive and meet the challenges of the industry. Time-to-market becomes very critical for service companies and the pay-back period of R&D costs is usually heavily accelerated at the early product stages, i.e. when introduced and during the growth stage.
- Steel & metals. The oilfield is using a number of high-performance steel and alloys, to ensure that tools can work at required well conditions and achieve maximum reliability.
- Non-magnetic stainless steel such as P530, P530HS, P550, P580, P650, P670 and P750 is used. This type of steel is specifically developed for oil field operations and used mainly for down-hole applications, e.g. drill collars, subs, housings used with directional drilling tools. The P550, P650 and P750 are mostly used, with the P550 being a more common grade. Basically, the higher the number, the stronger the steel is. The P550, P650 and P750 are used in a harsher environment, with high H2S content and potential pitting and corrosion issues. Costs and lead time for this type of steel go higher with the grade and there is limited production capacity worldwide.
- Monel and Inconel alloys, used for various down-hole tools, are austenite nickel-chromium-based superalloys and is a trademark of Special Metals Corporation. There are different grades of inconels, but all are mainly composed of nickel, with chromium as the second element. Inconel is used in high temperature, corrosion and pitting environment, acid applications, exposure to high mechanical stress and seawater.
- Forged steel is used in manufacturing shafts for directional drilling tools
- Maintenance costs. The reliability of directional drilling tools is of utmost importance; hence maintenance plays a key role. Due to long exposure to high temperatures down-hole and other damaging conditions, electronic components of the tools are prone to failure. Following manufacturer QA/QC processes and inspection requirements is key. Any repair of the tools must be done by the OEM.
- Personnel costs. Since the segment is comprised of numerous service providers of various sizes, the call-out nature of the services and employment patterns are mixed between permanent staff and temporary personnel pool. The availability of qualified and experienced personnel is highly evident.
Total Cost of Ownership
Total Cost of Ownership
- The total cost of ownership in this category is very complex and heavily driven by technical aspects. The more complex and demanding geological and drilling targets are, the more complex the TCO is. Unit price per tool becomes irrelevant when it comes to complex directional services. Aspects like reliability, safety, efficiency, track record in a similar formation and personnel experience, become highly important and far outweigh the standard price per unit comparison.
- Charges for equipment damaged beyond repair (DBR) are overlooked in many occasions and may contribute a significant proportion of costs to operators. There is a number of strategies to mitigate it, such as to request a higher grade material, where applicable, introduce flat a flat DBR rate per month, irrespective of the number of DBR cases and a few more. Due to long lead times on high-tier directional drilling equipment and required internal revenues assigned to each tool within service companies, the lost revenue or lost opportunity plays an important role in revenue models for services companies, hence prices they are able to give to operators. E.g. if a tool is lost in a hole or damaged beyond repair with an average lead time of 3-6 months, the lost revenue period of 3-6 months is built-in into lost-in-hole and/or rental prices of that equipment.
Coupled with strategic importance, spend and criticality of Directional Drilling services, the category requires the most attention. Options in managing it include:
- Effective category segregation methodology to clearly divide two segments, Low-Tier and High-Tier. This will allow to:
- To ensure a more competitive environment and increased participation of domestic companies in the Low-Tier subcategory
- Develop long-term relationships with suppliers in the High-Tier subcategory to manage technical and drilling challenges, and ensure drilling objectives are met in the most competitive manner
- Avoid transactional procurement and concentrate on long term benefits
- Maintain regular communication with suppliers to ensure innovation and continuous service level improvements
- By introducing footage rates and an effective incentive system with pain share and gain share, brings value to both operators and service companies. Building and maintaining an effective and economic incentive mechanism is the key.
Below are a few important things to know:
- Non-standard equipment size makes it difficult for service companies to plan and achieve the best utilization of equipment between operators
- Backlogs in manufacturing capacity in times of high demand is an issue
- Availability of qualified and experienced personnel
- Doglegs/deviation angles created that will impair the company able to come out of the well or conduct well intervention activities later on.
- Value of LWD tools when drilling wells that are not meant to be producers. For example, injections wells may not require logging-while-drilling tools, as there is no value in obtaining this information.
- Long horizontal wells will make it difficult and expensive to conduct well intervention activities at a later stage