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Crude prices to curb oil well cement consumption through 2022

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Oilfield Technology,

The market for global oil well cement, a specialty niche cement product used in oil, gas and geothermal well-bore drilling, is projected to exceed five million tons by the end of 2017. The figure represents a 26% decline versus the 2013 peak, according to CW Research’s World Oil Well Cement Market Forecast 2022.

Nonetheless, the outlook for oil well cement is not all doom and gloom, as Robert Madeira, CW Research’s Managing Director and Head of Research, explained: “API-certified, as well as non-certified equivalents, class G and H oil well cement consumption is expected to benefit over lower-grade oil well cements, such as class A and Ordinary Portland Cement (OPC) blends. Following the Macondo accident, drillers have been pressured to comply with ever-tighter cementing regulations, and few are willing to chance it when it comes to cementing jobs. With respect to lower demand, we are not really seeing a decrease in oil well cements, as much as a “new normal” for lower crude oil prices with a following lower drilling activity.”

Today, the oil well cement segment is valued at US$0.5 billion and expected to surpass US$0.7 billion by 2022. The world demand for oil well cement (API-certified and non-certified products) represents a small, but highly specialised and important, segment of the global cement industry, accounting for less than one percent of the 4.2 billion t world cement market.

Crude oil prices slow drilling activity

As crude oil prices trade below the US$45 per barrel threshold, there is limited incentive for drillers, especially in high-cost markets, such as US shale, to increase crude output, let alone drill new wells. Consequently, the comparatively lower drilling activity has negatively impacted oil well cement consumption. Looking forward, however, CW Research expects average crude pricing to rise over time, and, in its base case scenario, to trend above US$70/bbl by 2021.

OPEC’s (Organization of the Petroleum Exporting Countries) attempts to constrain the oversupplied crude market, with the end goal of raising prices, have so far had a limited impact. Several markets, such as Libya, Ecuador, Qatar and Iraq, have been exceeding their quotas on crude production under the OPEC deal. Meanwhile, non-OPEC markets, such as Russia, Kazakhstan, Canada and Brazil, are additionally expected to bring large drilling projects online in the coming years, which are forecast to add more than 1 million bpd to the global production capacity. Nonetheless, with a somewhat improving global demand profile, prices are expected to slowly tick up over the coming years, leading to higher levels of drilling activity.

The current pricing environment for crude oil will also pose challenges to capital expenditure for offshore drilling in some regional markets, such as Brazil, Russia, UAE, the Gulf of Mexico and the North Sea. Nevertheless, in its base case scenario, CW Research forecasts the new global well count to surpass 80 000 units by 2022. Throughout the forecast period, CW Research indicates that the linear distance drilled will increase largely owing to shale drilling (which uses horizontal drilling and longer runs than traditional oil wells).

Major end-users of oil well cement are the oil field services providers that offer well drill and cementing services. The largest ones include the global majors Schlumberger, Halliburton and Baker Hughes, as well as many regional operators. Nonetheless, the buyer segment is highly concentrated, giving important buying power to the oil field services companies.

Pressure from weak drilling activity

In 2017, oil well cement demand particularly declined on weaker drilling activity in the North America region, specifically in the US, the largest consumer at the global level. During the year, active rig count in the US reached a never-seen-before record low of less than 500 units. Similarly, drilling activity declined in Central and South America, Asia Pacific and the CIS.

Regionally, oil well consumption in North America is forecast to revert to growth in the coming years, registering the largest improvement in demand compared to other geographic regions. The increment will be supported by an expected recovery in shale activity. Though oil output in Middle Eastern countries is rising, the region’s oil well consumption is not expected to see significant growth, in CW Research’s base scenario, given that drillers need to drill fewer wells in order to maintain production.

Oil well cement price premium shrinks

Oil well cement is a premium cement product owing to its higher production costs relative to Ordinary Portland Cement. Raluca Cercel, CW’s Senior Consulting Analyst, explains: “more limited demand for API-certified oil well cement, compared to OPC product, means that producers often do not operate dedicated production lines. Kilns are switched from producing OPC to manufacturing oil well cement throughout the year as demand requires, typically at higher cost and lower yield.” Consequently, in 2013, oil well cement prices reached an average premium of 2.5-3.0 times that of OPC average prices. But with the current weak demand, the average premium has fallen sharply in many regions.

As observed by Robert Madeira: “the sharp fall-off in pricing has compressed the pricing premium of oil well cement, especially API Class G and H, comparing to OPC, further challenging the production economics. Exacerbating the pricing challenge is that many new markets are seeking to use class A and additives whenever possible, not to mention boost the use of cheaper extenders in the cementing mix.”

Nevertheless, there are pockets of still-strong demand for oil well cement product, attracting new entrants. For instance, India Cements and Pakistani Thatta Cement have recent diversified their product portfolios to include oil well cement (API-certified G class).

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