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Demand and supply

The outlook for energy demand and supply associated with the investment estimates differs only marginally from that in the WEO-2013 New Policies Scenario. Global primary energy demand rises by around one-third in the period to 2035, driven higher mainly by China, India, Association of Southeast Asian Nations (ASEAN) countries and the Middle East. Oil and coal consumption grow more slowly than the overall rise in energy demand (12% and 16%), while natural gas, nuclear and modern renewables rise more quickly (44%, 74% and 134%) .

Despite low or zero-carbon energy sources meeting 45% of the growth in primary energy demand, the share of fossil fuels in primary energy demand falls only gradually, from its current 82% to a 76% share by 2035. Global carbon-dioxide (CO2) emissions rise on average by 0.7% per year, slower than the 1.2% annual increase in energy demand, but well above the rate consistent with limiting the long-term rise in the average global temperature to two degrees Celsius, the internationally agreed target. This scenario also sees some progress towards broadening access to modern energy services, but similarly falls far short of the goals set by the international community.

World demand to rise 5.1% annually through 2020
In 2014, Industrial valve sales were less than $57 billion. By 2020, revenues have been forcasted to be between $65 - $75 billion, according to the latest forecast from the McIlvaine Company in Industrial Valves World Market.

Although growth will be healthy across the globe (spurred by recovery from the recent economic downturn), the drivers of growth will vary by region. Advances in developing areas such as China and India will result from ongoing industrialization, as investment in water infrastructure and electricity generation grows. In developed areas, continued advances in manufacturing output will provide growth in the process manufacturing market. Oil producing nations such as those in the Middle East will see gains due to rising production. In the US, demand in the oil and gas market will benefit from infrastructure construction and increased production due to shale development, as well as from the improved economy.

In the mean time price of oil has been cut in half from highs in 2014 of over $100/barrel. An increase in conventional production at the expense of subsea and other unconventional options would result in smaller revenues for shale and subsea valves producers. In general valve sales for oil and gas will be negatively impacted by the lower prices. The question is: What is the magnitude and duration? Oil prices have always cycled. When prices fall, the highest cost producers cease activity. Ultimately, this creates shortages and prices rise. Producers who will drop out in the short-term are operating on the following realities (less investments):

  • Exploration: 30%-40% of total cost/bbl
  • Development and Production: 60%-70% of total cost/bbl
  • Decline Rates: 5%-30%/yr. (production from a specific well)

• Exploration has been estimated to be around $30/bbl for a new source. So at $50/barrel, the exploration is going to drop substantially. However, exploration accounts for a relatively small percentage of the total valve revenues.
• Development includes drilling new wells in areas which have already been explored. So at $50/barrel, there will be justification for this investment. The cost of operating existing wells is small. Thus this production is unaffected.
• The decline rate is the key factor in the rebound of prices and valve revenues. Averages of 10-15%/yr. have been cited for the industry. If no new wells were drilled, the flow would drop by 20 or 30% within just two years. The decline rate for shale sources in the U.S. is being debated. The ability of conventional suppliers in the Middle East to raise production from existing wells is also in question.

It is likely that demand will continue to rise. The lower oil prices and booming economies in Asia and the U.S. will contribute to that rise. So imbalances in supply/demand and potential shortages will lead to the next round of oil price increases and investment in both conventional and unconventional sources.
Valve revenues will also be impacted by technology developments. The cost of direct coal-to-liquids could be as low as $40/barrel. If so, China would dominate the world energy picture. There are continuing developments in the extraction of oil and gas from shale. The cost of unconventional extraction rises as old wells need enhanced recovery, artificial lifts and other investments. 

As the cost of unconventional extraction is reduced, the margin between the two is narrowed. The result is less ability to manipulate prices by conventional producers.
Valve performance improvements are another factor which would positively impact valve revenues. There are lots of problems with subsea valves. Operators will be willing to pay more for valves which are more reliable under the most extreme conditions. Unmanned operations will be preferred to actual human intensive operations.

Urgent need to reduce oil industry costs

World oil prices have fallen by half since last autumn. Even before the collapse, reducing costs was already seen as a priority. Now it is an absolute necessity. And it’s high time. Prior to the recent crash, oil prices had hovered around $100 per barrel for almost half a decade. Despite high prices, oil and oil services companies have posted modest recent returns, due to their burgeoning costs. Why the increased costs? A major reason is the complexity of many exploration and development projects.

This complexity rose as companies tapped into deeper water, tighter rock and mature fields that required more operational attention. Moreover, many new projects were in emerging markets or remote areas with limited infrastructure, and operating in such locations also drove up costs. In addition, rising global demand for skilled workers and for commodities such as steel led to higher supply chain costs.

IHS tracks major aspects of upstream costs, and its capital costs index and other relevant indices have more than doubled over the past decade. It’s now imperative that oil and oil services companies reduce costs to maintain viable returns. The industry has faced downcycles before and knows the usual responses well: convince suppliers to provide the same for less; ration capital spending; restructure internally to reduce overhead; and try to negotiate better terms with host governments. An additional avenue for reducing costs today is adoption of innovative technologies such as automation/unmanned systems, advanced sensors and sophisticated data analytics.

Oil and oil services companies are already busy trying the approaches listed above. But there is another response as well that could enable a step-change advance in cost performance. This would be to get back to basics and simplify the problem.

In summary

• the price of oil will stabilize at $ 50 - $ 55 to end of 2015 -> temporary stop to huge investments

• oil production costs on the average are -> $40 for conventional, $70 for shale and $ 80 for subsea:

  • investments on production for convenvional oil will stay as forecasted
  • investments on production for unconventional oil will depend on efficiencies producers will introduce to lower actual costs (standard use and better technology)
  • subsea oil is under evaluation

• general market orientation is to standardize all processes : drilling, production, down stream

• low price will generate demand increase which generates price increase

• however, the price per barrel will never exceed $70 - $80 in medium and long term -> producers will have to revise their business plans according to new prices; marging will be driven by cost reduction and better productivity

• Successful, capital-efficient IC&E (instrumentation, controls and electrical) execution is always important, but in difficult times, it gets extra attention.

• In boom times, multi national oil companies have no incentive to shop around for better deals as they just want to stick with what they've always done and keep things simple. When profits are squeezed however, it’s a different story. Oil producers need to stay profitable so costs, time scales and efficiency of products are all under review - giving smaller, less well known suppliers a chance.

• There are two main reasons why companies will have to quicly evaluate cost cutting / efficiency drives. One is to actually cut costs and become more efficient and the second is to satisfy their Investors & Stakeholders that they are doing everything they can to weather the actual storm.

• Actuators in the Oil and Gas industry provide durability, reliability, and a level of safety. Depending on the level of automation and the size of the operation it is estimated that there are around 4,000 actuators in a typical refinery.

• There are many current conversations taking place in regards to the falling gas prices. These conversations lead to the reasons why many companies need to pursue the automation industry even more.

• Storing and loading oil as well as liquid gases is something that occurs in various storage and export facilities around the globe. These facilities have a high demand for actuators and valves. Actuators provide control of multiple products, capability of emergency shutdown at a fast pace, accurate monitoring and control, a continuous visibility of operations, and a high level of safety.