Category description

Cementing services are required to hold well casing in place and prevent any fluid movement from the reservoir to the wellbore. It also provides zonal isolation and provides seals when required. A cement is made through a process of mixing water, oil well cement (API cement, Portland cement) and chemicals to produce cement slurry. This slurry is pumped into the wellbore through casing and fills the space between casing and the wellbore (open-hole area below casing).

A plug (cementing plug or wiper plug) is inserted in casing, before cement pumping operation starts. As the slurry progresses though casing, the plug travels ahead of cement slurry, providing sealing  and removes any debris or particles from casing. This is required to ensure that cement slurry is not mixed with other well fluids and free of any contamination. Specialized equipment located at the bottom of casing (float collar and float shoe) allows cement slurry to go out of casing and fill the gap between casing and the wellbore. These tools also stop drilling fluids to travel to back into the casing. Once the cement slurry is hardened (thickening time), a cementing job is considered to be completed and all the tools are removed. Hardening time depends on a number of well parameters and drilling requirements. Various chemicals used during cementing operations, allowing engineers to design cement slurry with required hardening time. 

Cementing operations are divided into primary cementing/zonal cementing and secondary cementing. The major objective of the primary cementing is to hold casing in place. Zonal isolation is required and designed to control liquids flow between zones in a well, seal off a zone with lost circulation, reduce / prevent penetration of water to the well.  Primary cementing is used during drilling a new well. Secondary cementing, or squeeze job, is used to rectify any problems with the primary cementing job or deal with cementing issues that were caused during production, damaged casing, perforated section, plug & abandon a well and help to achieve better well stimulation jobs by effective confinement. 

Preparing the right cement slurry and achieving required physical properties are of very high importance to ensure that the primary cementing job is done well and well integrity is maintained.  If the cement hardening time was not calculated correctly and the required physical properties of cement slurry are not achieved, a well may collapse inwards, causing massive damage and significant costs, after which, the well may be abandoned. Cement slurry is prepared and mixed at the surface (on a drilling rig) and then pumped to the well by powerful cementing pumps. In onshore applications, specialized trucks are used to mix and pump cement slurry. 

Chemicals or additives used to prepare cement slurry include accelerators - shortening the time for cement to harden - and retarders - increasing cement hardening time. Other chemicals change density of cement, compressive strength and flow abilities. Additives called extenders are used to achieve higher volumetric of cement, so less cement is used. Antifoam agents are used to deal with foaming. For deep wells, high pressure and high temperature, high H2S wells and CO2-resistant cement systems, other special chemicals are used to prepare cement slurry.

Depending on the formation and well characteristics, the design of cement slurry and placement techniques plays one of the central roles. The quality of oil well cement and additives can have a tremendous impact, both on well's integrity and costs of cementing services. Frequent laboratory tests of additives and cement slurry itself is required to ensure that actual parameters match to the designed characteristics of cement slurry. 

On average, primary cementing services constitute around 5% of well cost. Secondary cementing can result in an incremental increase of up to 20% of well cost. 

Risks & Opportunities

Value opportunities and risks are features or requirements that may add or detract from the overall value offered.

To ensure value is maximized attention should be given to the following areas:

  • Cement Quality - Cement quality has important implications for the total well cost. Lower quality may result in the requirement for secondary cementing or the higher consumption of cement additives both increasing the well cost. To avoid such quality needs to monitored through a rigorous quality control process
  • Propriety Cement - Propriety cement need to be considered carefully. Whilst necessary in certain applications the use of such restricts market competitiveness. Buyers should carry out a full total cost of ownership analysis factoring risks and opportunities
  • Split vs. combine A number of additives are available on the open marketplace at competitive pricing. This may result in lower total cost shower runs the danger of creating quality issues and potential "gaps" in responsibility should the cement not meet the quality requirments. This would be of most concern in complex well applications
  • Unit Optimisation - In onshore applications it is typical to utilize one cementing unit per drilling rig. Cementing units could be used rotationally between drilling rigs, thus minimizing requirements of units and reducing overall well cementing costs. Skid or track mounted units are extremely mobile with little rig-up and rig-down time and capable to move effectively in remote desert locations
  • Compensation Model - Unit rates compensation models encourage wasteful behaviors. Under unit rates, cementing companies are incentivized to consume more cement and additives. Lump sum charges for a cementing job, with clearly defined desired outcome / characteristics, could be extremely beneficial in many occasions when the wells drilled in standard batches, e.g. during a development phase. 

Supply & Demand Dynamics

Demand

Demand for cementing services is directly driven by drilling, well intervention and plug & abandonment activities around the world.  North America is the largest market for well cementing services, followed by Asia Pacific. The Middle East is one of the smallest segments, accounting for less than 5% of the market. Onshore cementing services represent more than 85% of the sub-category, although offshore cementing represents the largest growth area.

Primary cementing is in higher demand when compared to secondary cementing services. The boom of shale oil and gas drilling has had tremendous impact on demand for cementing services, due to the number of wells required to drill to develop such resources. 

The Middle East will continue generating strong demand for cementing services due increasing activities in re-development and well intervention operations, due to age of wells. 

Although drilling rig activities is the closest indicator of the demand for cementing services, well total depth would required more cementing slurry. Hence, a combination of rig activities and well depth are the key demand indicators. 


Supply

Supply of cementing services is composed of equipment, personnel and materials. Materials, cement and additives, represents the biggest supply risk and volatility. Global cement production has been dominated by China, accounting for more than 50% of the global output followed by India, USA and Brazil. The Middle East's combined cement production capacity represents less than 5% of global capacity. Saudi Arabia and UAE are major producers of cement in the region. For the past several years, capacity utilization of cement production has been less than 70%. Historically, global capacity has never reached a full utilization. The highest utilization rate of 90% was achieved in 2008. It can be anticipated that break-even utilisation levels are circa 75% with producer gaining significant pricing power at 80% to 85% utilization.

As a result of regional projects, World Cup and Expo, utilization of regional production capacity is expected to be close maximum. Coupled with demand for cementing services in the oil and gas industry, and the fact that more than 80% of global cement production is used by non oil and gas industries, secure and stable supply oil well cement may become at risk in the near future.

When it comes to cement additives, more than 70% cement additives used in the oil & gas industry is unique and not used by other industries. Hence, proprietary additives produced by major well cementing companies are critical to well cementing services, in particular high H2S, HT/HP wells and deep water. Yet, there is a number of chemical manufacturers who produce standard additives for the service companies and able to serve the marketplace outside their traditional customers (cementing companies).

Halliburton and Schlumberger are dominant market players, controlling more than 60% of the global well cementing market. On average, both companies have equal share of this segment. When it comes offshore, Halliburton has been historically a leader in shallow water applications, whereas Schlumberger have dominated the deep water segment. There are a few smaller regional service companies, who would specialize in less critical jobs, where high-performing proprietary additives are not used.

In the Middle East, Halliburton  than is the dominant player, controlling almost half of the market, closely followed by Schlumberger. Baker Hughes and other niche service providers make up the rest and represent less than 20% of the segment.

External Scanning

There is a significant dependence on service providers in highly complex well applications, as the design and cementing slurry is critical and the competition in these high-complexity wells is limited to major service providers. In standard applications and secondary cementing, the power balance moves to Buyers due to a number of factors.


 
New Entrants is Medium
  • R&D Intensive
  • High-end additives
  • Expertise in Oil & Gas
  • Lower & Higher tier markets
 
Supplier power is Medium
  • Few providers
  • No alternative for buyers
  • Suppliers know-how is critical in certain applications
Competitive Rivalry
  • Limited competition in complex  drilling applications
  • Proprietary  additives
  • Potential  for more vendors in lower tier market
Buyer Power is Medium
  • Spend is high
  • Quality and know-how is critical
     
 
Substitution
  • Does not exist
 

Portfolio Positioning

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 cementing sub-category is positioned as a LEVERAGE category (ie. low to medium supply risk, medium to high profit/value risk).

  • Low supply risk is supported by:
    • Ample suppliers in lower-tier segment 
    • Higher- tier segment consist of major service companies with expertise and know-how to solve well cementing challenges 
  • Medium to High Profit/Value is determined by:
    • Quality of cementing services and cement  job directly impacts well's integrity, production and HSE
  • Power is balanced between the Buyer and Supplier (See External Scanning section)
  • LEVERAGE



High
Low
High

Cost & Price Analysis

Price Analysis

During the last several years, prices for well cementing services have been showing conflicting trends. On average, prices for cementing services have increased less than 10% over the last 6-8 years despite volatility in oil well cement and additives. Most notable increases have come from additives used in shale drilling where increased demand has driven prices up as much as 50%.

This category is known for market share battles between various service providers. What is also evident is the irrational bidding of service companies: service providers may, especially bigger integrated companies, provide lower or breakeven pricing, in order to protect its market share or a particular client.  

Current industry  downturn and commodity prices drive the prices of cementing services down on a large scale, hence significant reduction  in prices shall be expected in 2016 and 2017. 


Cost Analysis

The breakdown of an average well cementing job is as below - materials being the largest cost proportion.  In standard wells the split between additives and cement is circa 40:60 whereas in complex wells the proportion of additives is far greater with a split of circa 70:30. 



Major cost drivers are:

  • Research & development and additives costs. Cementing companies spend a significant amount of capital on R&D to be competitive and meet the challenges of well cementing. Developing cement additives to address new challenges and provide desired cementing outcomes is a costly process.
  • Cement prices. Cementing service companies have no or little control over prices of oil well cement. Since Oil & Gas industry consumes less than 20% of the global cement production capacity, cement producers tend to dictate their pricing, after they've served their primary market, i.e. construction sector. Cement producers would provide better pricing to those service companies, who provide bigger revenue for them. Prices are also driven by capacity utilization, construction activity and energy costs (up to 30%).
  • Maintenance costs. Reliability of cementing units (pumps and other equipment) is of high importance; hence maintenance plays a role. Following manufacturer QA/QC processes and inspection requirements is key, as rig shutdown as a result of malfunctioning equipment is costly. 
  • Personnel costs. Most of the cementing personnel is a medium skill job, hence the rates shall not exhibit any increase, unless a unique expertise is required. Established processes and cement programmes are followed by operational personnel on the rig. 

Value Chain Analysis

Major manufacturer of cement outside of UAE

  1. Lafarge
  2. Holcim
  3. CMBM
  4. Anhui Conch
  5. Heidelberg
  6. Cemex
  7. Italcementri
  8. Aditya Birla 

Additives producers 

  1. Aubingroup 
  2. Univar Oil & Gas
  3. Naolco
  4. OMNOVA
  5. Ashland 
  6. Hexion Inc.
  7. SNF
  8. Flotek

Cementing units manufacturers 

  1. Stewart & Stevenson
  2. NOV
  3. Gardner Denver
  4. Halliburton
  5. Freemyer Company


Total Cost of Ownership

These are the important factors to consider, beyond purely commercial aspects: 

  • Cementing services are priced differently, depending on well types and applications. Daily or Monthly rates is a common way to pay for cementing equipment (pumping, storages, mixing) with various approaches to the actual cement jobs. 
  • Additives utilization and consumption patterns are one of the critical areas to understand, in order to select the right pricing mechanism. In applications with known and consistent cement designs, paying a lump sum per month ( with caps on materials consumption) might be a solution that gives visibility to all parties. On the other hand, actual consumption based compensation is better suited in the areas of fluctuating demand and type of cement slurry.  


Other costs to be considered:

  • Cost to change from one contractor to another, specifically when units are stationed and require installation work that may result in excessive standby costs for (e.g. offshore drilling rig). Generally, it takes 4 to 15 days to swap a cementing unit on an offshore rig, depending on the installation location of the unit on the rig. In many occasions, and if possible, making it clear in the contract, that changing the units will be done by the company at no-cost-of-change (e.g. during a rig delivery inspection, work-over operations etc) may encourage cementing service companies to be more competitive, as they have been made aware that this particular constraint has been addressed and will not make anyone less competitive because of the cost-to-change.

Strategy

Localization

Very high potential to build up domestic expertise and additives manufacturing capabilities