Oil and Gas Investor: Artificial Lift—An Uplifting Choice

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[Editor's note: A version of this story appears in the June 2021 issue of Oil and Gas Investor magazine. Subscribe to the magazine here.]

Since the 2015 market downturn, U.S. land operators have trialed using different forms of artificial lift to meet operational and financial objectives. It resulted in most oil and gas operators using two or three types of artificial lift during the life cycle of a typical unconventional well.

Before the downturn, most U.S. land operators would complete and flow the well before placing on artificial lift, which was predominantly rod lift. Today, most land operators elect to use either gas lift or electric submersible pump (ESP) systems as their first form of artificial lift while rod lift is rarely used as the first form of lift for unconventional wells.

The preference of using ESP as the first form of artificial lift is driven by the desire to maximize IP rates, but these benefits were often offset with short run times and associated ESP failure due to sand, solids, debris, gas slugging and deposits such as scale.

During 2015, 2016 and 2017, it was not uncommon for U.S. land operators to experience multiple ESP failures within the initial six to nine months of operability. ESP providers, however, responded with improved designs and capabilities in the past few years, and today ESPs have improved mean time between failures (MTBF) performance dramatically with approximately 80% of U.S. land ESP users achieving up to nine months or longer run rates before failure.

These performance improvements, along with attractive commercial leasing arrangements, continue to support use and adoption of ESPs as a preferred first form of artificial lift for unconventional wells in the U.S.

Gas lift is commonly preferred among U.S. land operators due to low cost and reliable performance with average MTBF rates of nearly 36 months. Land operators have been increasing the use of downhole pressure and temperature gauges to optimize the performance of their gas lift systems, and nearly one in three gas lift installations today employ use of downhole gauges.

The use of plunger lift and gas-assisted plunger lift has gained popularity in the U.S. in recent years and provides additional benefits of helping to address production tubing buildup with each cycle.

Land operators are plagued with deposit control concerns that are not being fully addressed with current production chemical treatment programs. Approximately 20% to 50% of U.S. land artificial lift system failures are attributed to the ineffectiveness of the production chemical treatment programs such as for corrosion, scale, wax, paraffin and/or H2S depending upon the artificial lift system type.

Chemical and mechanical failures

Due to the integrated nature of the artificial lift systems and efficacy of the production chemical treatment programs, a significant opportunity exists in the market for suppliers that can help address both the chemical and mechanical failures in the market. These findings coupled with increasing interest to leverage digital solutions and remote operations to reduce environmental impact, respond to COVID-19 workplace concerns, improve safety performance and lower operating costs further create opportunities for innovative suppliers to deliver integrated production solutions.

Today, operators have to construct their own integrated production solutions approach leveraging multiple suppliers. However, it is entirely plausible that the market will continue to innovate and respond to these growing needs with integrated offerings and analytics to address the measurement and monitoring of emissions along with critical facility equipment monitoring and integrity as well as traditional production chemical pumping systems and artificial lift controllers and downhole sensors.

In the Kimberlite Production Solutions Business model, suppliers with strong digital footprints will be able to aggregate and analyze disparate data sets and integrate into a cohesive production solution to optimize production and financial results. Rather than simply monitoring a pump off controller to determine if a beam pump is operating properly, the analytics of the future will be able to integrate downhole well performance data, production chemical input data along with other sensors to predict not only future well failure events but predict downstream impacts on the production facilities, equipment and broader operation.

Headwinds for rod lift market

The rod lift market continues to innovate in response to the growth of gas lift, plunger lift and ESP in the early stages of land wells’ life cycles with advancements in long stroke capability and continuous sucker rod technologies to address concerns and challenges with deviated wellbores and tubing wear.

The 2015 market downturn and the pandemic-driven market downturn created additional headwinds for the rod lift market, particularly the smaller-sized units, due to a surplus in used equipment as operators shut in wells and converted rod lifted wells to gas lift. This allowed operators to redistribute equipment in the field and the excess of used rod lift equipment also carried over into sucker rods where the used/inspected sucker rod business no longer looks like a niche market but rather a truly defined segment positioned to survive well into the future.

In the later stages of the well’s typical life cycle, land operators continue to prefer the use of rod lift due to low bottomhole pressures. In other words, U.S. land wells will die on rod lift, not ESP.

Looking ahead for U.S. land, rod lift installations will increase as wells transition from gas lift, plunger lift and ESP to rod lift. But again, the used rod lift market will continue to place headwinds on the rod lift business depending upon the size of unit required and future rate of well abandonment creating additional inventory of both surface units and used sucker rods.

Downturn impact on buying behaviors

The trends in artificial lift installations shown in the exhibit above reflect the impact of the market downturn in 2020 whereby gas lift and ESP installations declined due to fewer wells being drilled while rod lift conversions continue to occur from wells drilled in prior years.

The U.S. land market for artificial lift will benefit from improved drilling activity in 2021 with U.S. land operators projecting to drill approximately 9.6% more wells in 2021 versus 2020.

In addition, U.S. land buying behaviors continue to evolve. While some believe that the market is entirely 100% price and procurement driven, market data reveal otherwise based on the voice of the customer research conducted by Kimberlite. In fact, the U.S. land market is heavily influenced by service buyers for gas lift and plunger lift while rod lift buyers strongly value technology/performance in their recommendation and use of a supplier. ESP buyers tend to value technology/performance and price in their recommendation and use of a supplier.

Looking internationally and offshore, the artificial lift markets are a bit less dynamic than that of U.S. land with respect to switching of artificial lift systems, but these trends may change as the Middle East and other regions begin to look at unconventional trends for future resource development.

Currently, the offshore market remains dominated by gas lift and ESP, while the international land market is dominated by the use of ESP followed by rod lift.

Buying behaviors internationally and offshore also reflect segmentation among technology, service and price buyers depending upon artificial lift system type and market segment. Technology and service tend to play a higher role internationally and offshore in the recommendation and use of suppliers.

A promising year is ahead

The international artificial lift market will benefit from improved drilling activity in the second half of 2021 with international land operators projecting to drill 5.6% more wells in 2021 versus that of 2020. The offshore market will remain essentially flat in 2021 with some observed growth projected to occur late into the year as offshore operators begin to take advantage of strong commodity prices and low oilfield service company pricing.

Next year will be the year for the offshore market to experience additional increase in investment and drilling activity that should translate into growth for the artificial lift market. It is common for offshore operators to take a more cautious approach and wait until the market is stabilized with favorable forward strips on three-year and five-year oil before making significant future investment commitments.

Oilfield service company pricing has taken a hit in 2020 and is currently at historic low prices that are unsustainable longer term. Oilfield service prices will trend higher in the second half of 2021 and into 2022 due to increased cost of shipping, steel and other commodities. Oilfield service companies are not positioned to absorb these additional costs and will be past through to the operators later this year and into 2022.

Whatever the future holds in the years ahead, the oil and gas industry has proven time and again the ability to innovate and adjust to challenging market conditions. One difference coming out of the COVID-19 pandemic is the realization that the use of remote operations and digital solutions will continue to grow and develop as operators seek to improve efficiencies and financial returns.

David Bat is president of Kimberlite International Oilfield Research and brings over 30 years of extensive energy and oil and gas experience. Kimberlite is a recognized leader in the industry for “voice of the customer” oilfield research tracking all facets of the upstream industry including technologies and supplier performance.