Artificial lift in North America onshore: evolution, not revolution

August 2017 | Dimitar Kostadinov and Brandon Stackhouse

Like most oilfield services, the artificial lift sector declined sharply during the oil downturn. From 2014 to 2016 new unit sales decreased by nearly 60% while repair and maintenance services decreased by ~25%. Although the market’s exposure to an established base of producing wells allowed it to weather the past three years better than services like pressure pumping or contract drilling, the artificial lift sector faces changes to both technological preferences and business model that will determine its future growth. Here we examine the broad challenges affecting the market and how they apply to the three primary lift technologies.

Exhibit 1: North America artificial lift market1

1 Including new unit sales and aftermarket services
Source: McKinsey Energy Insights OFScope – June 2017

The first challenge is an operator mindset that often deprioritizes production phase services like artificial lift. Additional investment in more complex well designs (e.g. deeper wells, longer laterals), higher quality completions equipment, and larger volumes of proppant is viewed as a prudent expense that will increase a well’s estimated ultimate recovery (EUR) and boost an operator’s profitability. While outfitting a well with premium lift equipment can reduce intervention frequency and moderately increase production rates, the value of increased investment in artificial lift in a highly price-sensitive environment is less clear to operators.

This is reflected in the second challenge, which is the commoditization of artificial lift products. No recent technological advances have created differentiation within the market for the most popular lift methods: sucker-rod pumps (SRPs), gas lift systems, and electric submersible pumps (ESPs). This has encouraged operators to select equipment and services based primarily on price, prompting service companies to focus on developing low-cost offerings and placing sustained pricing pressure on the market. This continued trend has created uncertainty about the long-term recovery of the artificial lift equipment sector.

Taking a closer look at the three most used artificial technologies in NA onshore reveals different histories but similar potential paths forward:

    • Gas lift: Although it has been around for decades, gas lift’s popularity has only started materially increasing in the last 4-5 years. Several large independent operators, such as Pioneer, have shifted to installing gas lift on new producing wells, taking some of the market share previously held by rod pumps. The low operating costs and increased reliability make gas lift more attractive, despite initial hesitation due to a lack of supporting infrastructure (e.g. gas compression and available gas) and shortage of in basin experience installing the systems. The latter is of particular importance given the inability to optimize the systems once equipment is deployed downhole, a departure from other lift technologies. As a result, we estimate approximately a third of new wells in the Permian are receiving gas lift systems, and the number will likely continue to grow.

      From a technological standpoint, the recent improvements to the gas lift system components and compression process have been largely incremental. Traditional OFS players primarily buy manufactured equipment from a handful of third parties and add a service component, such as installation, to complete their gas lift offering. The simplicity of the system is a double-edged sword for service companies; it leads to more sales as operators target cost-efficiencies, but it presents limited opportunities for service companies to improve profitability.

    • SRPs: Easily the most recognizable pumping technology in the oil field, SRPs have seen a turbulent last three years. Prior to the oil price crash, industry heavyweights like Schlumberger and GE Oil & Gas (Lufkin) were struggling to manufacture equipment quickly enough to match incoming orders. However, with the new “lower for longer” oil price environment, operators have moved from buying pumpjacks in advance to just-in-time purchases, buying a refurbished model, or opting for a used unit instead. Furthermore, the production ramp-up of 2014 resulted in excess inventory, which has still not been cleared on either the OEM or operator side. Add to that the cost competitive gas lift option and it becomes apparent why SRP prices have crashed and are not showing signs of recovery even in the Permian. However, it has not been all bad news for service companies. OEMs have managed to decrease their costs, mainly by sourcing from countries like China, meaning that they do not necessarily need to go back to peak price levels to achieve similar profitability. Also, SRPs remain the most common terminal lift method, and there are many applications for which they are the preferred lift option (e.g. basins where winter temperatures stay at or below freezing, wells that do not produce enough gas, and wells that do not have access to gas infrastructure).

    • ESPs: ESP usage has fluctuated throughout the years with significant declines in 2016. Given its relatively short run life and the high-cost of intervention and replacement, the ESP was the first technology to see a sharp waning in operator interest. The increased availability of E&P quarterly data has also not helped; investors have become less impressed with high 30- or 60-day well production numbers generated through ESP pumping than they are with the broader picture of each operator’s performance. Still, recent deals like Halliburton’s acquisition of Summit ESP and FET’s acquisition of Multilift signal that the largest OFS players believe in the technology and its potential to be an economic alternative to other types of lift going forward.

      ESPs have seen some technological developments, and numerous providers are now offering “rigless” ESP systems, as well as in-depth pump diagnostics and optimization. Pump components have also become more durable and able to handle deeper shale environments. The real innovation in the ESP space has been on the business side, however, with several large ESP producers launching a rental offering. In order to make ESPs attractive options, oilfield equipment and service companies are offering ESPs as monthly rentals, with replacement and refurbishment included. This has gained significant traction with some operators in the first half of 2017, and for good reason. Spending $200,000 on a new pump and having to replace it a few months down the line is a risk not many are willing to take in a sub-$50 WTI environment.

      While the benefits for operators are clear, there are major questions around this model’s long-term sustainability. To be economic, ESP providers need to rent out equipment at a monthly rate that would be close to the equivalent period purchase price. However, current rental prices are at a substantially decreased rate, mostly due to the rental pumps being lower quality than the ones for sale. These economy-offering pumps also have a higher risk of failure, leading to increased replacement costs for the ESP providers and reduced pricing power. This has the potential to give rise to a vicious cycle of increasing costs and decreasing revenues for providers, making change inevitable. Either rental prices will increase towards pricing parity with new purchases or the rental model will be deemed an unsuccessful experiment.

Overall, each lift system’s share of the market has slightly shifted over the last few years with seemingly no groundbreaking technological changes foreseeable in the near term. With the chances for making radical technological advances fairly slim, what can an OFS company do to help prices recover and improve sales from its artificial lift segment across the board? In the past few years, large players have worked aggressively to strengthen positions in SRP and ESP, but new shale wells have begun pivoting towards gas lift in favorable basins, which offers the lowest profit pool on a per unit basis. Firms have responded by innovating commercially in ESP to try to claw back share but full-cycle economic sustainability of those new solutions is questionable.

Going forward, industry restructuring is expected to continue as artificial lift players strive for greater profitability amid a welcome but modest recovery in newly completed wells. Yet service providers may need to go further if they are to create additional value for their customers. One possibility is service companies integrating the lift selection method into the operator’s broader strategy for asset development, helping to ensure that the right lift method is chosen for each well even if that method is outside the norm for the operator. Currently lift selection is largely driven by the production engineer’s familiarity with a product and their personal preference, leading to well/system mismatches. In a low-oil-price environment where realizing efficiency gains across the well lifecycle is essential, engineers can no longer rely on choosing the method that’s most familiar and will have to focus on making objective, data-driven choices.


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About the authors

Dimitar Kostadinov and Brandon Stackhouse are senior analysts in McKinsey Energy Insights' Houston office.

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