How the leasing model is implicating equipment design in the oil industry

By Billy Pierce and David Nemetz
The long-term effects of the prolonged trough in oil prices are yet to be established. But there...

The long-term effects of the prolonged trough in oil prices are yet to be established. But there are certain trends that have emerged as a response to the changed financial climate that look set to remain with us when prices return to pre-2014 levels.

One of these is a growing interest in a rental business model for key equipment from long-established OEMs. Of course, interest in the rental market is not new: and certain operators have built their business on leasing rather than purchasing equipment. But more and more operators are exploring rental options in preference to outright purchase of, for example, new IWOC systems. At a time when every CapEx dollar is being scrutinised and every investment decision has to clear a much higher bar, the rental model makes a great deal of financial sense.

The standard economic argument for specialisation of labour applies: it enables operators and service companies to focus their money, their time, their attention and their engineering resources on improving well-control or intervention packages. Meanwhile, experienced manufacturers continue to focus on their core competencies and direct their resources and engineering staff to the control equipment and systems. What’s more, those manufacturers continually improve both product and deployment, as they apply their experience from projects of all kinds around the world, and then make that collective wisdom available throughout their rental fleet.

There are plenty of obvious examples where the rental model clearly reduces risk. Firms developing multiple fields in deeper and more complex waters, such as the Gulf of Mexico, require advanced high pressure, high temperature and highly collapse-resistance IWOCs, for example. Renting those systems, or – once available – 20,000-psi umbilicals from expert suppliers and assigning the costs to the OpEx ledger significantly lowers the risk profile of investing in hard-to-access and yet-to-be-proven fields.

There’s also the question of total life-of-field costs associated with owning an asset that has to be maintained over its lifetime or put in long-term storage to be preserved for future use. What’s more,  acquiring approval to transfer assets from one project to another from what is often a number of owning partners can be challenging – and that’s before obtaining the internal fund transfers needed to make good with the asset-owning partners.

Not surprisingly, more and more operators regard this operating model as an old-fashioned way of doing business. Now they are exploring all possible avenues to reduce Capex and Opex – and to simplify their business models.

Rental in workover and intervention environments

Of course, the industry is not just experiencing the pain of enduring price pressures. This is also the post-Macondo environment, which has led to an increased emphasis on API standards and their dissemination around the world.

In particular, the much-discussed and reviewed API 17G is set to provide some very targeted guidance on how sub-sea well intervention and sub-sea well control systems that connect to a marine or workover riser, are to be supplied. The shift to a rental model allows OEM companies to focus on these critical changes, and to apply their engineering resources and expertise to make sure equipment meets demanding API standards. 

These are the general arguments that have fed the growth in the global rental-and-services market. However, when it comes to the intervention and work-over space, and the rental demand for IWOCs and related equipment, perhaps the most compelling argument is that of timing.

In a market focused on maximising or even restarting production on wells that have experienced difficulty, demand is not forecast eight to ten months in advance as it is in the traditional completions space. With insufficient time to spec, manufacture, deliver and deploy a whole new umbilical system, equipment that can be quickly reconfigured and delivered is the obvious answer.

Technology and design factors

That is the theory behind the growth in the rental model that we are seeing around the world. However, if that theory is to really deliver on its promised advantages, then there are two key factors that must be taken into account. The first, and most obvious, is the technology that goes into a rental fleet of IWOCS and the second is the quality of the people delivering them.

Obviously there are certain design features that are determined by circumstance and which limit their suitability for multiple, multi-region deployment. The length of an umbilical will be determined by water depth. Equally, available vessel size and restrictions on reelers are key factors of umbilical and IWOC design. It would be foolish to suggest that a vessel and attendant equipment intended for the 10,000 ft. depths of the Mexican Gulf could be sent to Malaysia and its 2,000 ft. waters, or visa versa.

Equally, deployment methods for IWOC systems will also be determined by location: for example, some are specifically designed to be current resistant, so that loop currents or strong straight-line currents do not inhibit an operators’ ability to move forward with interventions or P&As.

But these restrictions notwithstanding, for the multi-use rental market, where cost-effectiveness and rapid deployment are critical drivers, control systems have to be built with hydraulic and electrical versatility in mind from the outset. If they are to be configured to meet operators’ needs in a matter of weeks or run multiple hardware manufacturers’ equipment, versatility must be a key part of the design’s DNA.

Regional systems and standardised components

Rather than looking at multi-regional system designs to meet these demands, equipment manufacturers are looking at component designs and establishing which can be standardised for all geographies and operating conditions, and which are specific to a particular region or water conditions.

For example, an umbilical termination assembly (UTA) based on a modular design can be run either with a mud mat so it can deploy a pendulum, or without one. That modular UTA can therefore be run anywhere in the world with multiple different deployment styles, and allows quick and easy reconfiguration for new well types or tree types. Similarly, as-built hydraulic schematics can also be tailored or reconfigured before being dispatched to site: in this case, the reconfiguration is dependent on the specific hydraulic and electrical circuits running a given piece of equipment.

Finding these and other commonalities helps equipment manufacturers re-deploy their rental fleet in multiple regions. For example, we are seeing high collapse-resistant hoses and nitrogen lift systems used to address balance hydrostatic problems and bring a well online or to bring a well test in various areas, such as those that include heavy-weight hydrocarbons, lower reservoir pressures or particularly deep waters.

These hoses, plus the vessels, risers and umbilical’s, developed for the North Sea can, with relatively minor modifications, be deployed off in fields off the coast of West Africa. Equally, in Brazil, a number of operators are carrying the equipment specifications and requirement that they refined in the North Sea.

Integrated engineering skills and service ethos

The second factor is the nature of the company providing the equipment. Consider again at the example of the hydraulic schematics. Consisting primarily of standardised components and design, they still require some configuring in the manufacturing plant to meet the precise requirements of the user. To meet the tight deadlines and avoid costly errors, the rental supplier must have exceptional engineering talent available to carry out the necessary specifications – not to mention the experience that comes from deploying intervention and workover systems in multiple environments.

In the search for commonalities and consequent efficiencies, suppliers still have to be able to understand the regional nuances, the small differences that ensure rental equipment is fit for purpose even when it was not originally specified and built for that particular purpose. This means that operators have to choose their suppliers with extreme care.

The understanding of what can be standardised and commoditised and what requires configuration, as well as which parts of the world can share equipment, and which can’t, requires a supplier that has that global experience and international footprint – and a considerable amount of experience in deployment, installation, maintenance, repair and even off-shore operation of equipment. 

Personnel also have to be as agile and versatile as the equipment they are providing. The rental model depends on technicians who are cross skilled in many different forms of hydraulic and electrical expertise, in different areas and who can therefore make sound decisions in the field. Service technicians who are exposed solely to a service environment rather than the full gamut of engineering requirements often struggle to meet demands of rental customers.

In other words, the supplier must have a manufacturing pedigree as well as a strong service background. Although the traditional purchase model has always benefitted from having a service capability, the rental market really emphasises the need for integrated engineering and support services.

The API Q2 standard is proving beneficial here. Because it establishes how the industry tracks the competence of people over time, suppliers have the means to prove to customers that the people they provide alongside the equipment have the necessary skills for any given task. It provides the essential trust that underpins any successful rental model.

The future of rental

Current market conditions have pushed operators and service companies that were previously inclined to own their own systems into the rental market. There is still a thriving purchase model, and there will always be circumstances in which the decision to invest CapEx in IWOCS for workover and intervention purposes is the right decision. For example, in remote areas, where installing and de-installing equipment is a challenge, purchasing is likely to be the preferred way forward. 

However, the current market has shone a light on the advantages of leasing equipment and those advantages don’t necessarily disappear with a resurgent oil price and CapEx being made available for investment in offshore assets.

For years operators have relied on global manufacturers to provide top-quality, robust, hard-to-break equipment. As they get used to leasing the same top-quality, robust, hard-to break equipment without any compromise to the integrity of their wells, or any loss of service and support, some of those operators may become permanent converts to the benefits of rental. Either way, for this market to be sustainable for all participants – suppliers and customers – manufacturing expertise, engineering skills and a relentless focus on the highest quality technical support will remain absolutely essential.

Billy Pierce and David Nemetz, JDR Cable Systems.


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