Category description

Wellheads and Christmas Tree are not the same. Wellhead systems are required to control pressure during drilling and production, and serve as a point to suspend casing & tubing strings, as well as a connection to the surface pressure control equipment, i.e. blow out preventer (BOP) ( during drilling stage) and christmas tree ( during production stage) . It also allows access to the well, under pressure, in a safe and controlled manner.  A wellhead consists of heads, hangers, spools and a series of seals. Christmas Tree consists of chokes, valves and spools. The main purpose of christmas tree is to control the flow of well fluids or gas during production. Additional functions of christmas tree include pressure relief, chemical injection, a conduit for control systems to monitor and control safety valves in down-hole. 


Both, wellhead systems and christmas tree are produced in different sizes and configuration, with various pressure and temperature rating, material class requirements and completion capacity, i.e. single or multiple zone. Standard working pressure ratings classification (in psi) is 2K, 3K, 5K, 10K, 15K and 20K.  


Wellhead systems and christmas tree (BOP during drilling) are the most critical well component, as the act as a 'gate' between subsurface and surface. 

Wellheads are divided by application and types.

  • Land  / Onshore
  • Subsea
  • Surface ( jack-up or platform) 
  • WELLHEAD APPLICATION TYPE
    • Land
    • Subsea
    • Surface ( jack-up or platform)


  • WELLHEAD TYPES
    • Standard
      • Oil Producer
      • Gas Producer
      • Gas Injector 
      • Water Injector 
      • Water Producers 
      • Gas Lifted Wells  
    • Special 
      • Beam Pumped Wells
      • Steam Injecti
      • ESP wells
      • Plunger Lifted Wells 


Christmas Trees are divided by application and type, as well.

  • Christmas Trees 
    • Surface Tree ( Dry Tree) 
    • Subsea Tree ( Wet Tree) 
      • Dual Bore Subsea Tree 
      • Conventional Tree
      • High Pressure / High Temperature
      • Horizontal & Vertical  

Subsea Trees far more complex than Surface Trees, since the Subsea Trees must be designed to allow tie-ins and umbilical connections subsea. 

A christmas tree could be made from a single block of steel ( i.e. machined from a big size steel bar) and called Solid Tree, or a Composite Tree, which is an assembly of valves around a central steel body. Composite Trees are mainly used for low risk and low pressure wells, as the composite nature of the tree may be prone to leaks.

API 6A and ISO 10423 are the standards used in wellhead and christmas tree equipment manufacturing. Below is a  quick reference guide for material and temperature classification. 

Risks & Opportunities

  • Material selection and fit-for-purpose, as well as design (standard design) would result in significant cost saving and improvement in lead times. 
  • Used in H2S applications, cladding technology used in manufacturing process is a very a time consuming and slow process. Global cladding capacity is limited and a larger proportion of capacity is allocated to other industries more than to oil and gas
  • Limited forging capacity globally allocated to other industries more than to oil and gas 
  • Long lead times for sour services wellheads and christmas trees can reach up to 24 months

Supply & Demand Dynamics

Demand 
In the long run, demand for wellhead systems and christmas tree is directly influenced by demand growth for fossil fuels. In simple terms, the more wells are drilled, the more wellheads and christmas trees required, although there might be instances where existing equipment could be refurbished and reused.

In the short term, oil price volatility affects the demand for wellhead systems and christmas trees, as fewer wells drilled during industry downturn. This, however, has limited effect on wellhead and christmas trees manufacturers, due to significant backlogs of orders and limited manufacturing capacities. In general, a 4 to 24 months time lag is required to have a significant impact on the supply side in this category. 

In the GCC, the demand for wellhead systems and christmas trees is be driven by:

  • Exploration activities in KSA
  • Fields redevelopment in UAE -onshore and offshore
  • Heavy oil projects in Kuwait
  • Maintain production in KSA and Oman 

The closest and direct indicator of demand  for wellhead systems and christmas tree is drilling activity, i.e. rig count and utilization. 


Supply 
Wellhead and christmas tree industry has been dominated by major players. In the surface equipment market, Cameroon, FMC and GE are the leaders, controlling more than 60% of the segment. In the subsea segment, Aker, FMC, GE and Cameroon are the key players, controlling around 80% of the market.

FMC is the market leader in both segments and has been the leader in the Middle East for many years. Yet, in 2016 Cameroon has been taking a significant lead in UAE. In addition, the market is known to be segmented into lower tier and higher tier. While the lower tier segment might have a large number of suppliers, the higher end is limited to majors, such as FMC, Cameroon and GE. 

External Scanning

The balance of power is almost equally spread between buyers and sellers, as the suppliers might have unique technologies that are critical to buyers. However, coupled with competitive environment and a potential for new players in lower-tier market, the buyer is in a stronger position than seller, especially for lower technology segment. Yet, the high technology sub-category ( HTHP and sour applications) is limited to a smaller number of suppliers, but still making it competitive.



 

New Entrants is Low 
  • Hi-tech market
  • Engineering and design is key
  • Access to the quality suppliers and steel forging companies is vital


 
Supplier Power is Med
  • Many suppliers available
  • Heavily dependent in Oil & Gas 
  • Need revenue to cover fixed costs and have access to the right suppliers


 


Competitive Rivalry 
  • Completive & established market 
  • Highly regulated by standards
  • Product differentiation
  • Lower and Higher-tier segments

 
 


 


Buyer Power is Medium
  • Balanced market 
  • Might be forced to buy from a certain supplier
  • Spend is significant 


 
Substitution 
  • Do 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
    • Very long lead times and backlogs in production capacities
    • Quality and reliability are of highest importance 
  • High profit/value risk is determined by:
    • High levels of expenditure
    • Defects  or  inferior quality equipment affects production ( lost revenue) and represent safety and environmental concerns
  • Power is balanced with a power shift toward Buyers in the lower-tier segment. 

  • STRATEGIC 


High
Low
High


Cost & Price Analysis

Price Analysis 

Prices for wellheads and christmas trees have witnessed a consistent increase over the last 10 years. Post 2009 prices showed a significantly higher increase, than the prices from 2012 onwards. Partly, the reason is a direct result of long-term raw material orders made by manufacturers, during the high times ( 2007/2008), with a pressure being released post 2009/2010, when the steel industry went through a significant downturn.

In addition, prices vary significantly, depending on the type, pressure rating and application. A standard configuration wellhead and christmas tree would be in the area of between US$150k to US$2500k, whereas a hi-end subsea wellhead with working pressure rating of 20K, would be priced in the area of US$ 3M. Sour services equipment and non-standard size increase the prices significantly.  Material selection is a distinct price driver. A sour service ( e.g. sour gas) application will result in up to 5x difference in prices for wellheads and christmas trees.

Order size plays a major role in prices and leads times. With bigger orders, better prices and shorter lead times are likely to be obtained, as a result of priorities assigned by suppliers. 


Cost Analysis
The price of the Wellhead or Christmas tree of comprised of the following major elements (percentage variance may exist with around 5-10% variances) 



Major cost drivers are:

  • Steel and metal prices - directly impacts the cost basis. In particular, carbon steel, stainless steel, corrosion resistance alloys ( CRA) and Nickel.  
  • Personnel costs -wellhead personnel is a very skilled job and lack of highly experienced personnel is always evident.  
  • Manufacturing process - robust manufacturing process is a significant cost driver, in particular for higher-end equipment, HP/HT and sour applications.
  • Capacity utilization - this element, being a variable cost, is a significant cost contributor. 

Total Cost of Ownership

Procurement of wellheads and christmas trees is always driven by technical requirements that are regulated by common API standards (API6A). All manufactures are obliged to comply with the standard. Hence, the manufacturing process is very prescriptive. What that means is that wellheads and christmas trees could be treated as commodities, unless special applications (HPHT, sour services) are required. 


Important factors to consider when looking at total cost of ownership:

  • Suppliers track record and traceability of materials, equipment and manufacturing process is of utmost importance
  • Access how your existing stock of wellheads could be refurbished and reused 
  • Maintain contracting relationship with suppliers for spares and services 
  • Access cost benefit of standardization through reduced inventory, interchangeability with incumbent equipment and reduced service cost
  • Check your current inventory for spares and estimate what would be additional costs to switch
  • Compare the rates for running tools, service personnel and spare parts. You may be looked into high "services" costs, once a lower priced wellheads and christmas trees is purchased

Strategy


Localization

  • Ultimately, localize the bottleneck production process ( e.g. cladding, forging)
  • Develop local manufacturers in lower-tier category