Category description

Drilling Fluid, also called mud, serves many critical roles in drilling and completions. These include:

  • Pressure control - preventing a blowout
  • Lubrication and cooling of the drill bit and drill string
  • Corrosion control
  • Transporting drill cuttings away from the drill bit towards the surface
  • Stabilizing formations by coating the walls and providing pressure
  • Sealing permeable formations, called “Mud cake”
  • Suspending drill cuttings when the drilling operation is paused (called circulating)
  • Transmitting hydraulic horsepower to the drill bit and other down-hole tools - such as mud motors
  • Drill string torque control in deviated wells
  • Using drilling fluid is the only way to control pressure inside an open well and avoid fluid flow or collapse of the well. The mud weight is adjusted by adding certain chemicals to achieve a pressure balance between the pressure inside the wellbore and the pressure exerted by fluids in the surrounding formation. An effectively planned and maintained drilling-fluid system can significantly increase the penetration rate when drilling, solve a number of technical well-related issues and can protect the reservoir from damage (e.g. from the invasion of fluids and solids into productive zones).

    Mud is mixed on (near) the drilling rig (although occasionally it is mixed in tanks onshore and then shipped to the rig by vessels) in mud tanks and is pumped to the well by a system of mud pumps and pits, through a hollow in the drill pipe. Once the mud reaches the drill bit, it (the mud) is sprayed out from nozzles on the drill bit. By maintaining the pressure using mud pumps, drilling fluids travel upwards within the annulus (the space between the drill string and the walls of the wellbore). As the mud flows to the surface, cuttings generated in the drilling of the well are transported to the surface. Once on the surface, the mud is cleaned and the solids are removed and then it is re-circulated back to the well, subject to mud checks and the addition of any required chemicals.

    There are three types of drilling fluids, which are described below. Although water-based mud (WBM) is the most widely used system, it does not offer the same advantages as other types of fluids, such as oil-based mud (OBM) or synthetics-based mud (SBM). Collectively called non-aqueous fluids (NAF), OBM and SBM provide far more superior performance in terms of stability of the well, rate of penetration and overall drilling efficiency, but they are costly systems to apply. In some instances, OBM and SBM may be the only technical solution and WBM may not be an option due to the down-hole conditions. Over the last 10 years, drilling-fluid service providers have been able to develop better-performing WBM called high-performance water-based mud (HPWB), which in many cases provide similar benefits as OBM and SBM, yet at a lower overall cost.

    y not be an option due to the down-hole conditions. Over the last 5-7 years, drilling-fluid service providers have been able to develop better-performing WBM called high-performance water-based mud (HPWB), which in many cases provides similar benefits as OBM and SBM, yet at a lower overall cost.

Water-Based Mud Systems 
Water-based mud is the most basic system and is composed of water (fresh and seawater), clay (bentonite), brine and other chemicals/additives. KCl-PHPA (+ glycol) is a classical WBM type and is the most cost-effective solution with moderately water-sensitive shales. Sault PHPA (+ glycol) WBM can be used with less-water-sensitive shales and when the utilization of KCl (potassium chloride) is not allowed. Other systems include KCL polymers, milling fluids and lignosulphonate mud.

An HPWB mud system provides similar benefits as OBM and SBM, yet at a lower total cost. HPWB mud includes unique salts, special shale stabilizers, inhibitors and viscosifiers. HPWB mud is commonly used and is beneficial where the performance characteristics of OBM or SBM are required; however, it is cost prohibitive to use them due to the high costs of waste management and disposal, or facility limitations that restrict the installation of waste handling and processing equipment. The costs of HPWB mud can sometimes exceed the costs of OBM or SBM, but as the disposal costs of non-aqueous fluids, i.e. OBM and SBM, is high, their total cost is higher that that of HPWB mud.


Oil-based Mud (OBM) and Synthetics-Based Mud (SBM)
Oil-based mud is a drilling-fluid system composed of base oil, water, additives and chemicals. Depending on the application and regulatory and environmental requirements, the base oil could be diesel, kerosene, low-toxic mineral oil or synthetic oils, such as esters, olefins or paraffins. Effective shale inhibition is one of the main advantages of OBM. The ability to support drilling in a high temperature environment, where the water component of WBM would be boiled out, is another key advantage of OBM. In addition, OBM can be reused many times and can be stored for a long period of time.

Due to the toxicity of OBM, disposing drill cutting and waste fluids generated by OBM is prohibited in offshore applications. Drill cuttings and waste fluids are thus processed and shipped to shore for disposal. SBM systems were developed to address this constraint. There are many applications worldwide where the waste generated by SBM is disposed of offshore; however, it is still prohibited in the Caspian Sea and North Sea, where all drill cutting and waste fluids generated by SBM must be shipped to shore for processing and disposal. 

The major technical drawback of using OBM or SBM is, due to their hydrocarbon nature, which may show as spurious hydrocarbon indications in the reservoir where there is none and can cause the contamination of cuttings and core samples. However, complex analytical tools are available to mitigate this problem; for instance, in the GCC region, base oil such as Escaid 110, Saraline 185V, DF 1 and diesel are used.

The range of chemicals and additives used in the drilling fluids is extensive, but the most widely used are: bentonite, barite, calcium carbonate, calcium chloride caustic soda, polyanionic cellulose (PAC), xanthan gum, polysaccharide, sodium chloride, soda ash, various lost-circulation materials (LCM), glycol, mud thinner and H2S scavengers. The roles of the chemicals and additives are diverse and mainly involve providing viscosity and rheology control, shale stability, cooling and lubricating, lost circulation, inhibition and encapsulation, mud weight and corrosion control.


Completion Fluid 
Completion fluid (aka work-over fluid) is a fluid used to complete the well and is normally a salty solution made up of e.g. chlorides or bromides, which is also called Brine, as must be free of any solids. Completion fluid should be compatible with the innate formation fluids and rock, as other type of fluids (e.g. drilling fluids) can damage the productive zones. In addition to cleaning the wellbore, after the drilling is finished, completion fluid is used to control the pressure down-hole, prior to and while well-completion operations are in progress.

On average, the cost of drilling fluid is 5-20% of the total well cost. However, a small marginal increase in spend on drilling fluids could be offset by the superior drilling-fluid performance achieved, thus can result in great cost savings, cost avoidance and a lower total well cost. Drilling fluids are becoming a higher percentage of a well cost and the trend is growing.

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;

  • Selection of the most appropriate drilling fluid system and composition has huge implications for the total well cost. Areas to be considered include:
    • Cost of system and availability of supply
    • Disposal and waste management costs
    • Cost of damaged third party tools and equipment due to corrosion, pitting or erosion
    • Rig modification required to handle OBM
    • Requirements of mud plants - build and operate your own mud plant to enhance competition, as the mud plant setup costs are  high and make many service providers less competitive
  • Inventory Control has the potential to avoid costly losses during unplanned events as well as drive up costs where buffer stocks are set too high. A balance must be struck between the low inventory levels and the risk of not meeting demand against high inventory levels and higher cost.

Supply & Demand Dynamics

Demand 

Demand for drilling and completion fluids services is directly driven by drilling and well intervention activities around the world. North America is the largest market, accounting for around 50% of the global industry size, followed by Asia Pacific and Europe. GCC is one of the smallest segments, accounting for less than 10% of the market. The well depth and footage drilled are the key factors in establishing the distribution. Other drivers that significantly affect the demand for drilling and completion fluids are shale oil and shale gas activities, coalbed methane and other unconventional resources. An increase in market size of circa 8% CAGR is expected between 2016 and 2021 (Source: TechSci Research).

WBM systems represent around 60% of the segment, with the remaining being equally shared between OBM and SBM systems. Almost 70% of the demand for drilling and completion fluids is generated by onshore projects.


GCC will continue generating strong demand due to increasing activities in:

  • Field redevelopment
  • Increased footage drilled
  • Well intervention operations due to ageing wells

Overall, demand for drilling and completion fluids in the GCC is expected to grow by around 5% CAGR from 2014 to 2019 (source Research and Markets). Oman and Saudi Arabia are the biggest segments, followed by UAE. WBM systems are dominant in the GCC, with wide applications of OBM. However, there is a continuous drive to minimize the utilization of OBM. Demand generated by onshore projects outweighs the offshore segment, accounting for over 80%; however, the later should exhibit a higher growth rate due to regional redevelopment activities, especially in  UAE. SBM has been used in the region in high temperature applications and where WBM was not an option.


Supply
The supply of drilling-fluid services is clustered around equipment, personnel and materials. The materials part, i.e. chemicals and additives, represents the biggest supply risk and is subject to very high volatility. The supply side is very fragmented and many drilling fluids service providers rely on local and regional producers. However, proprietary and hi-tech mud products are still produced in Europe and North America.

Although around 70% of the global drilling fluids market is controlled by just four companies, there are smaller regional and niche companies who provide drilling fluids services. Schlumberger/MI SWACO has been historically the strongest player, controlling around 35-40%, followed by Halliburton 20-25%, Baker Hughes 10-15% and Newpark 8-10%. Petrotech and SCOMI are active and significant GCC regional players. Over the last few years, there has been a number of acquisitions to ensure that companies are able to meet market requirements and to expand their geographic presence.

More than 80% of drilling fluids chemicals, additives or raw materials/feeding chemicals are used by other industries. Hence, drilling fluids service providers have little buying power in the market. On the other hand, between 20% and 40% of the chemicals used in drilling and completion fluids are pure commodity products. Around 20% of the remaining share is speciality mud products from propriety service companies. However, this may fluctuate depending on the application. Certain propriety mud chemicals produced by drilling fluids service providers are critical to well operations, in particular high H2S, HT/HP wells and deep water.


    


In many cases, when hiring a drilling fluids service provider, you are hiring a company that is good at identifying suppliers, the QA/QC of products, logistics, storage and disposal and that has a greater buying power, due to its global spend. The equipment used in drilling fluids services has little to no complexity, and is widely available in the market and, in many instances, is manufactured by 3rd parties. Engineering support and personnel, combined with proprietary mud products, are the key differentiators between service providers.

External Scanning



 

 
New Entrants is Medium
  • Expertise in Oil & Gas
  • Lower and Higher tier markets
  • Economies of scale are required
  • Highly competitive market
 
Supplier Power is Medium
  • Few providers
  • Suppliers know-how is critical in certain applications
  • Supplier's Supply Chain Management skills critical
Competitive Rivalry
  • Highly competitive market
  • Easy to switch between suppliers  with little product differentiation
    Limited competition in complex segment
  • Large working capital required
Buyer Power is High
  • Spend is high
  • Commodity and widely available products
  • Little Proprietary products
 
Substitution
  • Does not exist
 

 

Portfolio Positioning

Portfolio positioning is essential in guiding strategy within the sub-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 LEVERAGE category (ie. low supply risk, medium to high profit/value risk).

  • Low supply risk is supported by:
    • Ease of switching, 
    • Standardization across suppliers
    • High spend with regional buyers  / operators 
  • Medium to High Profit/Value is determined by:
    • Relative high levels of expenditure
    • High value generation/risk - opportunities associated with drilling fluid selection and drilling operation performance and risks associated with failure. 
  • Power is strongly favored towards the Buyer (See External Scanning section)


  • LEVERAGE



High
Low
High

Cost & Price Analysis

Price Analysis 

Over the period of 10 years prices of drilling fluids showed a significant overall increase in excess of 40%. Barite, being a scarce commodity due to declining reserves and one the key and high spend components in mud, exhibited a price hike well above the 100% mark.
       
Cost Analysis

The breakdown of an average well "mud job" is shown below. As seen, materials part is the highest cost element. Further on, between 20% to 40% of the chemicals used in drilling and completion fluids are pure commodity products. Less than 20 % of the remaining share are mud products that propriety to service companies. The rest are specialty-chemicals and widely available products that are sold by chemical producers in the open market.




Due to large number of mud products used in this segment, most of which are either commodities or commercially available specialty chemicals, price volatility is very typical part of the cost basis. A large number of chemicals and feed-chemicals for specialty products, may exhibit a price change of up to x5 within a short period of time. Completions fluids are highly volatile and the cost base may change x3 within a month. 

Changes in oil price have a significant impact on the cost structure of the chemicals industry. A large number of chemicals or feed-chemicals are produced from oil and gas or its derivatives. In addition, the production of many chemical is energy intensive. The time lag plays role affecting the cost basis, although energy intensive products are affected immediately. 

  • Research & Development- Mud companies spend a significant amount of capital on R&D to be competitive and meet the challenges for drilling fluids. Developing mud products that address new challenges and provide desired outcome, the right additives are the most critical component in certain complex applications.
  • Mud Products Costs - Mud companies have no or little control over the prices commodity materials and other products due to the fact that more than more than 80% of drilling fluids chemicals, additives or raw materials are used by other industries. Producers tend to dictate the pricing, after they've served their main markets such as: food, processing and chemical industries. Certain commodity products are driven by market supply and demand dynamics that is outside of oil and gas industry and sometimes works in completely opposite cycles.
  • Maintenance Costs - Reliability of mud equipment (mud plant, tracks, mud coolers, lab equipment ) is important, but not critical in most of the cases, due to little complexity in equipment design and time available. Hence, maintenance costs are insignificant.
  • Personnel Costs - little volatility, most mud engineering personnel is relatively medium skills jobs where rigid instructions are followed. However, in more complex wells and when high-performance mud is used, engineering support is critical, hence requires highly qualified engineers and may cost double.

Value Chain Analysis

Key producers of chemicals:

  1. Drilling Speciality Chemicals ( Philips)
  2. Nalco Champion 
  3. Clariant 
  4. Dow / Dupont
  5. Solvay
  6. BASF
  7. Tetra Chemicals 
  8. Wacker 
  9. Lamberti 
  10. Tiorco 
  11. Frachem
  12. ChemSol
  13. Stepan
  14. Huntsman
  15. Flotek
  16. Akzo Nobel 

Total Cost of Ownership

The total cost of ownership generally consists of:

  • Personnel costs - usually provided on daily rates basis
  • Equipment rental - usually provided on a daily basis
  • Mobilisations and demobilisation - Lump sum basis or cost plus
  • Drilling Fluids - on a consumption basis


Any mud system is based around the cost of building the mud and then maintaining it, hence two widely known categories are 1) the build cost and 2) the maintenance cost. To build a mud system, certain products and materials are mixed, after which the mud is used. Since drilling fluids lose their characteristics after being used in the well, mud chemicals must be added to the mud again to maintain the same mud properties. It is more costly to build OBM mud than WBM mud, due to the cost of the base oil, extra barite, emulsion-control products and mixing. Mud maintenance costs are usually higher than the build cost, especially in deep and high-pressure wells. 

While some systems can be reused, others require a more detailed understanding of the condition of the fluid left at the end of the previous well. A large number of additives and chemicals used in WBM systems are sensitive to bacteria, which can contaminate the drilling fluid and make it useless within just a day.

A consistent quality of mud products and additives is key to achieving the desired mud properties 

Another important factor is to understand and analyse the utilization rates for each product and how it affects the total cost. In many instances, higher-than-planned product quantities will be required to achieve certain mud properties, due to product quality issues and the dilution rate. This in turn increases the total mud cost, which can cause exceeding the estimates that were initially planned. Commercial models that address these issues (very common in this category) are thus critical during the tender evaluation stage.

The cost to change contractors, from one contractor to another, specifically when units are stationed and require installation work that may result in excessive standby costs for (e.g. for an offshore drilling rig) is another area to look at.

The recovery of base oil is one of the key challenges for many companies. Selecting a base oil that desorbs at a lower temperature makes the recovery process less energy intensive, and thus less costly.

Strategy

The sub-category analysis carried out presents a strong case for a strategy that maintains or further maximizes the power of the buyer. 

There are a number of ways in achieving this however the items should be considered;

  • Specifications - Specifications should be kept as generic as possible with a focus towards commodity chemicals ensuring a competitive market place
  • Aggregate vs. Segregate - Buyer's should look to leverage spend across their full drilling fluid requirement. Large volumes help in providing greater leverage to suppliers in there own supply chains. Segregation may be appropriate for speciality or propriety chemicals and more collaborative relationships may be appropriate in such instances
  • Competitive Tender - Tenders should be conducted to ensure maximum competition and followed with negotiations
  • Negotiation Style - Supplier should be approached with direct and hard (slightly aggressive) negotiations. The buyer should capitalize on market intelligence and seek to target prices based upon their understanding of costs and market conditions. Buyer's should target profit margins

Localization

  • Developing and maintaining local producers of commodity chemicals
  • JV and partnerships with global producers to set up plants for specialty-chemicals

Technical Insights

  • The implementation of nanotechnology in drilling fluids in the next big thing
  • Diesel, as base oil in OBM, is becoming a less preferred option due to its aromatics and environmental impact. Other base oils such as Escaid 110, Etrosol, MG3, Conoco LVT-200, Shell Saraline 185V , Total DF 1 are used.
  • Challenges in directional and extended-reach drilling require advanced engineered fluids. Hence a company with track-record is important to overcome these challenges. 
  • Engineering support and personnel combined with proprietary mud products are the key differentiators between service providers.
  • Equipment used as part of the services has little to no complexity and is available in the general marketplace from third party manufacturers.