Cost & Price Analysis
- Prices for equipment are expected to stay where they are or may demonstrate a marginal decrease for lower-tier and standard equipment, as a result of reduced demand
- Suppliers under pressure to contain costs. Lower capacity utilization and an increase in prices for iron ore, copper and nickel (for exotic applications) will be a challenge for suppliers to contain/reduce costs, in particular exotics applications and cables.
Over the last several years, the demand for ESP systems was fairly stable with moderate growth. However, the oil price downturn reduced global requirements for ESP, due to a reduction in activities, which put pressure on services companies and manufacturers to reduce prices. Yet, the correlation between ESP pumps prices and oil prices may not be linear since ESP systems consist of a large number of electrical and instrumentation parts, which is used in other industries, such as construction, electronics, aviation, military, medical, agriculture.
This is the category where the top-down pricing policy is widely used. One of the key elements the service provider would consider when pricing the ESP system is lost production opportunities and cost of ESP change for operators. The operator is 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 rates. This could be translated into millions of dollars of costs for operators.
Onwards maintenance of ESP systems is another large area of opportunity for service providers, due to switching costs. Depending on the operator requirements for ESPs, pricing models may be geared towards onward operations & maintenance of ESP systems, whereby the cost to switch is so high, that changing supplier is uneconomical.
The ESP system consists of Surface Equipment and Downhole ESP assembly. The majority of the components are electrical, instrumentation and steel. Depending on the design and application, costs of the ESP system may vary by 4 times e.g. chrome vs. stainless steel down-hole assembly. Below is an estimated cost structure of a typical ESP system.
Down-hole temperature is another factor that affects the costs of electrical components down-hole, e.g. cabling, sensors and seals, that can withstand high temperature or any other soar service environment.
In addition, an important factor that drives the cost of the ESP system is the design of the system based on the production ranges and initial assumptions. On average, ESP pumps and systems are designed to handle between 2,000-8,000 B/D that makes ESP service providers be competitive and refrain from spending large R&D costs to “tailor-made” an ESP system. The moment the ESP system becomes unique, R&D share in the system's price may go as high as 45%.
- Manufacturing & assembly costs- the majority of the components and parts used in assembling the ESP systems are electrical, instrumentation and steel. Most of the items are heavily used by other industries; hence ESP manufacturers may have limited control of costs.
- Research & development costs - for most ESP systems that are designed for standard applications, R&D costs spread over a longer period and larger markets. For any “tailor-made” systems, R&D costs are expected to go up significantly.