Category description

Directional drilling 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 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 is divided into of 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 on the opposite direction of the force.  In 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 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, power to the bit is provided by a mud-motor (positive displacement motor) and assembly of deviation tools,  such 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 technologies 


Majority of equipment used in directional drilling services is patented  to major service providers. The fundamentals of the technology is 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 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 hi-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 anticollision applications, where multiple wells are drilled in a 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 continues 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

  • 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, utilization of RSS systems is increasing and it proved to be 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 provide even better performance has been used more frequent in the GCC , over the last several years.
  • With tremendous progress made over the last 10-15 years in directional drilling technology around 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 that 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 Oil & Gas sector, hence 2nd tier suppliers prefer to allocate their manufacturing capacity to those industries. 

Supply & Demand Dynamics

Demand 

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, the 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 directional drilling segment.  Complex geological structures and shale are key drivers, with Middle East being the smallest market for directional drilling services.  Projected growth in the global demand for directional drilling services is around 11% CAGR (Source: Markets & Markets)

The complexity of equipment, services and value that it adds to operators and service companies is significantly higher in GCC, than in many other places. A number of new technologies in directional drilling services have its roots in GCC. Up until now,  between 75-85% of the directional wells in the GCC are drilled onshore, predominately in Saudi Arabia and Oman. Around 80% of new wells drilled in GCC are horizontal.

Generally, most of the directional drilling services used in offshore environment, unless operators are willing to maximize the reservoir penetration by drilling horizontal wells and / or in a confined space environment. Hence, in GCC high technology directional drilling services ( high-tier segment) is mainly limited to offshore projects, with less advanced equipment ( lower-tier segment) being used substantially while drilling onshore.  

 

Supply 

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, GE 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). Coupled with the recent GE / Baker deal and the fact the more complex RSS technology (high tier) claiming the market share from the mud motors segment (low tier) , there is a very high probability that the segment will become more competitive, as such buyer power will be improved. In GCC the market has been heavily dominated by Schlumberger.


Below is an approximate breakdown of the market division (adapted from Spears and Associates )



External Scanning

This is a Strategic category with a highly complex market structure. With a 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.


 
New Entrants is Low 
  • High CAPEX required & R&D Intensive 
  • Learning curve and technology constraints
  • New company is bought over by a  bigger competitor 



 
Supplier power is High
  • Set to increase, as a result of consolidation
  • Technology advancements and complexity 
  • Growing criticality of the services for operators


Competitive Rivalry
  • Lower-tier segment is competitive
  • Motor technology  advances 
  • RSS segment is shared between 2/3 companies
  • SLB is a dominant player, both by market share and technology advancements



Buyer Power is Low 
  • Very high tech equipment
  • Quality is critical 
  • RSS technology is critical
  • Reliance on service companies to solve the challenges  



 
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 sub-category is positioned as a Strategic

  • Medium to High Supply Risk is supported by:
    • Extremely limited competition in 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 favored towards the Seller (See External Scanning section), although lower-tier segment exhibits a power shift toward Buyers.

  • STRATEGIC


High
Low
High

Cost & Price Analysis

Price Analysis 

As a result of increased activity, during the last several years, prices  for directional drilling services have been showing conflicting trends on a global basis. There have been instances where the position of an existing dominant player(s) has been undermined, as a result of new entrants, in particular the North American market. Price trends in certain areas went negative year-on-year basis. For certain product segments, rates went down post 2008 oil price crash, but never recovered back.

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 its market share or a particular client.

In addition, based on the “big 4” financial analysis over the last 10 years, while the revenue were consistently growing amongst all 4 service providers, their profits did not follow a similar curve and remained somewhat flat, and ranged from 5% to 15%.

Going forward, the 2017 and 2018 prices for directional drilling services are poised to stay where they are in both tiers, although marginal increase in High-Tier segment cannot be ruled out.


Cost Analysis 

The breakdown of an average cost distribution of directional drilling is shown below. As seen, 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 a 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 space industry and requires 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 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. Oil field 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 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 super alloys and it 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 are used in high temperature, corrosion and pitting environment, acid applications, exposure to high mechanical stress and sea water.  
    • Forged steel is used in manufacturing shafts for directional drilling tools
  • Maintenance costs. Reliability of directional drilling tools is of utmost importance; hence maintenance plays a key role. Due to a 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, call-out nature of the services and employment patterns are mixed between permanent staff and temporary personnel pool.  Availability of  qualified and experienced personnel is highly evident. 

In addition, below is a generic map of how costs are build up, as you go through the value and supply chain. Due to nature of the business set up in oilfield service industry, there is a possibility that profit margins may exist in two instances, i.e. on a corporate level and on a business unit level, which result in double dipping. Head office would loan to a business unit a tool at fixed price and require a fixed pay-pack period. Business unit, in turn, will act as a separate business entity and mark up the tool and add all business unit level costs. The fixed price of a tool is based on the acquisition cost and a mark-up of the corporate office. The same principle applies for equipment / tools that is sold directly.

  • SERVICES
    • Acquisition
      • R&D
      • Manufacturing 
      • Financing costs
    • Operating
      • Logistics 
      • Personnel
        • In-house 
        • Temporary
      • Maintenance
        • Parts  
        • Depreciation
        • Personnel, equipment and leases 
      • G&A
      • Opportunity cost

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 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 are number of strategies to mitigate it, such as request a higher grade material, where applicable, introduce flat a flat DBR rate per month, irrespective of 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 4-6 months, the lost revenue period of 4-6 months is built in into lost-in-hole  and / or rental prices that equipment.  

Strategy


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 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 effective incentive system with pain share and gain share, brings value to both operators and service companies. 

Technical Insights

Below are few important things to know:

  • Non-standard equipment size makes it difficult for service companies to plan and achieve best utilization of equipment between operators
  • Backlogs in manufacturing capacity in times of high demand is a an issue
  • Availability of  qualified and experienced personnel
  • Dog legs / deviation angles created  that will impair  company ability 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 


Videos on how the technology works