GROWTH IN THE MEASUREMENT-WHILE-DRILLING SECTOR CONTINUES

Gordon T. Hall
First Boston Corp.
New York

The measurement while drilling (MWD) market is showing some of the most impressive growth in the oil field.

Tremendous improvements in the reliability and capability of MWD tools have spurred the expansion of this market. During 1990, the worldwide MWD market expanded by 48%, rising from $250 million in 1989 to $370 million in 1990.

The MWD market should expand 15-20% to exceed $430 million in 1991.

Although an expansion of 15-20% is considered good, further growth will be impeded by the slowdown of drilling in the Gulf of Mexico. Total market growth should return to greater than 20% per year in 1992 and 1993.

MWD technology is in the midst of a rapid adaptation phase, led by expansion of formation evaluation and other logs and by international expansion in long-reach directional and horizontal drilling. The formation evaluation-while-drilling market will have minimal impact on the size and growth of the wire line market.

Customers will increasingly employ teams which include drilling and petrophysics personnel to make MWD purchase decisions. Integration of performance drilling systems including all bottom hole components will accelerate because of increases in automation and the need for cost reduction.

As a subsegment of the directional drilling market, MWD accounts for about 40% of annual directional drilling revenues. MWD technology contributes to reduced finding and development costs for operators and, therefore, is a critical component of the oil service industry.

For certain companies, MWD prospects are important. Significant investment will be required to be a successful competitor in MWD.

OUTLOOK

There were four critical driving forces for the 48% growth in MWD during 1990:

• A 7% increase in drilling activity

• A four-fold surge in horizontal drilling

• An increase in the use of steerable systems and MWD tools in directional drilling

• An increase in the use of formation evaluation-while-drilling (FEWD) measurements.

Some of the factors that drove growth in 1990 are moderating in 1991. Nonetheless, the MWD market should continue to increase, and capacity constraints should ease.

The pivotal issue in predicting future growth in the MWD market is the technical adaptation rate. It is easier to define the ultimate opportunity than it is to forecast the rate at which the market will approach its optimum.

MWD revenues should expand by an average of more than 20%/year between 1990 and 1993.

Thus, the market could generate revenues in a range of $650-700 million by 1993 (Fig. 1).

MWD growth will be driven by improvements in the tools, increases in high-angle and extended-reach drilling activity, and increases in international drilling activity. The first two factors are functions of MWD technology, and the latter is related to industry growth.

The MWD string continues to undergo upgrading as formation evaluation logging tools develop and become more available. MWD and FEWD will become more commonplace as experience and confidence with the tools increases. In the near-term, the focus will be on formation evaluation, but other tools and controls relating to drilling efficiency will be developed as well.

MWD has already achieved a significant part of the market in the Gulf of Mexico and in the North Sea. In the other regions of the world there still remain significant opportunities to increase the use of MWD technology.

Directional drilling benefits from MWD technology because of the need for real-time directional information for course control. Additionally, once directional tools are used, FEWD becomes very cost competitive with wire line logging. Directional drilling is expected to continue to increase at a fairly rapid pace.

Directional drilling trends should favor the increasing use of steerable systems, especially in horizontal wells. In a recent report on horizontal drilling, First Boston projected growth in the use of steerable systems at 15-20%/year through the mid-1990s and growth in horizontal wells at more than 20%/year.

Assuming West Texas Intermediate oil prices stabilize somewhere in the range of $18-21/bbl, drilling activity should improve outside North America. Internationally, the trend is to directional wells instead of vertical wells, so the shift in drilling activity should be favorable.

In North America, disastrously low natural gas prices could continue to depress drilling activity. Extraordinarily depressed activity in one of the world's largest MWD markets, the Gulf of Mexico, could slow the growth progression of the industry.

FORMATION EVALUATION

MWD instruments are located within specially designed drill collars near the drill bit at the base of the drillstring (Fig. 2). The tools take various samples during the drilling process, and the information gathered may be stored in downhole memories or transmitted to the surface via pulses in the drilling mud.

MWD provides real-time data that may be grouped into two prominent categories:

• Direction and inclination while drilling (DIWD)

• Formation evaluation while drilling (FEWD).

Table 1 shows the estimated market revenues of various major companies involved in DIWD and FEWD.

DIWD provides real-time information on the course and trajectory of the borehole. These data are of particular importance in advanced directional and horizontal drilling. In steerable systems, DIWD feedback provides a basis for adjustments to the drilling process which enable the borehole to more accurately follow the desired path.

FEWD provides geological data on downhole formations much like conventional wire line logging. These data may be used real-time both to enhance overall drilling efficiency and to evaluate the hydrocarbon production potential of the formations encountered.

Although directional data inform the operator as to physical location of the bottom hole assembly, real-time formation evaluation data may help an operator determine if that location is optimum.

Resistivity and gamma ray are the critical measurements used to enhance drilling efficiency. These measurements provide the data necessary for formation identification. This identification, in turn, allows the driller to fine tune casing point selection and can warn of possible pressure kicks. If the data are timely, formation identification can also allow the driller to optimize drilling parameters.

With the addition of neutron and density sensors to FEWD equipment containing resistivity and gamma ray tools, the backbone of wire line logging, the "triple combo," can be provided in real-time. The triple combo provides data on lithology (rock composition), porosity, and oil or water saturation.

With triple combo capability, FEWD could fully satisfy logging requirements in many situations. Furthermore, neutron and density measurements could be very helpful in shallow gas detection where resistivity sensors are handicapped by the possible presence of fresh water. Real-time detection of shallow gas would be a major safety enhancement. Other tools that measure drilling mechanics such as true weight and torque at the bit can also improve drilling efficiency. Table 2 gives a breakdown of the availability of the various FEWD tools for the major directional drilling contractors.

MWD COMPETITION

There are four basic elements that help define the strength of the MWD competitors:

• Reliability

• Investment

• Critical size

• Integration of services.

Reliability and service quality are by far the most critical attributes that operators look for in MWD tools. Most of the competitors have made a tremendous amount of progress in this area. The improved reliability of MWD tools has helped push the adaptation of the technology.

In a growth market in which capacity is a constraint, effective investment is crucial. A company's ability to capture market share is directly related to its level of capital spending. In addition, when technology is rapidly changing, higher capital spending levels are an indicator that the company is placing the latest technology in the field.

MWD not only requires a large amount of capital spending but also a fairly sizable research and development (R&D) effort. Competitors need a critical size of business to avoid taking a bath financially. Incremental economics of investing are much better for companies that are established and have a large customer base.

The business volume can either come directly from directional services alone or indirectly through high volumes of complimentary business.

The integration of services is a rising trend in the oil field. This trend is pushed by the need to contain costs and by the use of increasingly complex technology. As the technology of performance drilling becomes more prominent, the integration of various services becomes more important. Integration can produce more efficient drilling, better well control, and reduced risk for the operator.

TELECO

Teleco Oilfield Services Inc. continues to be the biggest investor in the MWD market. In 1990, Teleco had capital spending of $68 million and R&D expenditures of about $18 million, a 71% plow back of 1989 revenues. The company plans to continue its investment throughout 1991 during which capital spending should reach $70 million.

The company has begun a major formation evaluation thrust. Spearheading the company's efforts are recently commercialized triple-combo formation evaluation sensors.

Field sources indicate that Teleco's FEWD tools, including the recently commercialized density sensor, are now achieving very high quality measurements.

MWD represents a significant growth opportunity for Teleco, particularly the expansion potential in formation evaluation and international distribution.

ANADRILL-SCHLUMBERGER

During 1990, Anadrill-Schlumberger moved into the number two market position, assisted by FEWD market penetration. Anadrill has advanced its position by commercializing the first wire line-compatible triple combo measurements and making large investments. Anadrill also benefits from the strengths of its parent company, Schlumberger.

Anadrill has begun experimenting with MWD tools beyond the basic suite of triple combo measurements. Prototypes include work in the acoustic area. In the near-term, this could produce a caliper, and in the long-term this could help develop an imaging device.

It is estimated that Anadrill intends capital spending of $80 million in 1991--a dramatic increase--and increased R&D expenditures.

SPERRY-SUN

Sperry-Sun Drilling Services had a strong year in 1990 with a 45% increase in MWD revenues. Baroid Corp., the parent company, also stepped up capital spending with an investment in Sperry-Sun of $29 million, a 31% plow back of 1989 revenues.

Baroid pioneered the formation evaluation portion of the MWD market and still benefits from its reputation as a leader. However, the company now faces an increasingly competitive environment as Teleco and Anadrill make major financial and marketing commitments to FEWD.

Baroid benefits from a suite of complimentary services offered by its Sperry-Sun division, particularly directional drilling, mud logging, and diamond bits. Also, the company offers a performance drilling package.

BAKER HUGHES MWD

Baker Hughes MWD is in the midst of a major effort to upgrade its MWD capabilities. The company plans to introduce a new generation of modular tools to strengthen its product line and expand its capacity. Its capital spending should increase beginning in 1992 as the new system is introduced.

Baker Hughes recently made a significant strategic decision to pursue aggressively FEWD. It believes that FEWD will become an increasingly important element of the performance drilling package in the future.

Baker Hughes' strategic goals for its MWD program are straightforward: Obtain technical equivalence in terms of reliability and sensor capability, then use its strong distribution channels. To execute these goals the company plans to commercialize a new set of tools beginning with a directional module and a new induction-based resistivity tool. These introductions will later be followed by the commercialization of a neutron sensor and then a density tool.

SMITH INTERNATIONAL

Smith International Inc. focuses on advancing MWD technology as it pertains to the drilling process. The company's strategy is to build from its strength as a leading directional driller and improve on the integration of directional drilling and MWD systems.

Smith International now has a commercial gamma ray tool. It plans commercialization of a water-based mud resistivity tool by year-end and an oil-based mud resistivity tool early in 1992. The company will then have the full identification capability critical to the drilling process.

Halliburton Geodata also has a sizeable MWD program, and Western Atlas International Inc. is expected to commercialize a product next year.

INDUSTRY

A comparative analysis of the five preceding companies shows that their capital expenditures and R&D outlays rose from, respectively, $125 million and $48 million in 1989 to $228 million and $64 million in 1991.

Industry-wide capital and R&D spending on MWD in 1991 is expected to represent a plow back of more than 70% of 1990 revenues. It is estimated that current incremental economics for established companies appear to support heavy investments. However, operators should be aware that excessive price sensitivity could impede the progress of this technology.

EFFECT ON WIRE LINE

Much has been postulated for many years about the threat of cannibalization of wire line logging by MWD. Real-time measurements provided by MWD could become a substitute for wire line logging measurements taken after drilling is completed. FEWD is now used in certain situations to replace wire line in surface logs but also, and more importantly, in some reservoir evaluation logs.

Alaska is one of the most prominent regions where some wire line logs are being replaced by FEWD.

The main reasons behind FEWD substitution for wire line on the Alaskan North Slope are:

• High operating costs

• Well-understood geology

• Extensive experience with MWD

• High-angle drilling.

These criteria should characterize the displacement of wire line by FEWD as the gradual process continues throughout the world. However, wire line cannibalization will not happen overnight.

The substitution process is accelerated by improved reliability and experience with FEWD equipment. However, massive wire line-based data inventories and extensive experience with wire line logs are impediments to rapid replacement.

Often this cannibalization has been pictured as a win-lose situation. Yet, the use of FEWD will result in an expansion of the overall formation evaluation market, not just a shift of revenues from wire line to FEWD.

• Substitution of FEWD for wire line logging is only applicable to certain situations.

• FEWD generates more revenues per well than wire line logging.

• Both techniques will be used in many critical wells.

• FEWD's greatest opportunity is to replace some of the low-end wire line service with a value-added service in "vanilla" wells.

The damage to the wire line market from FEWD will be minimal. Evidence now shows that FEWD can expand rapidly while wire line continues to grow at a rate substantially in excess of drilling activity.

The wire line market grew by more than 14%, rising from less than $2.3 billion in 1989 to $2.6 billion in 1990. This growth was achieved while industry activity rose by less than 7%.

The wire line market is protected because FEWD does not substitute on a one-for-one basis. Wire line is a critical and highly technical market. Thus, opportunities abound for the introduction of new or advanced measurements which can significantly enhance the cost effectiveness of exploration and development activities.

Because wire line logging plays a vital role in the success of exploration efforts, it should continue to have excellent pricing flexibility. The introduction of new wire line services and competitive costs serve as powerful offsets to FEWD cannibalization. FEWD grew 55% during 1990. This expansion is fueled by increasing operator acceptance coupled with the availability of more reliable, accurate, and advanced formation evaluation tools. Yet, this tremendous growth did not take much away from wire line.

Quantified substitution effects show that every $1.00 of added FEWD revenue would displace about $0.58 of wire line revenue (a 58% cannibalization index). The following assumptions were used to develop the index:

• Of the wells that used FEWD, in 70% of the cases wire line was replaced completely. In the remaining 30%, wire line logs either would not have been run at all, or they were run in conjunction with FEWD.

• Conservatively, FEWD generated 20% more revenues per well. The 58% index is calculated by dividing 70% by 1.2.

The index is then applied to the difference between the 1990 and 1989 FEWD revenues (Table 3).

Thus, FEWD replaced about $35 million in wire line revenues for 1990.

The bottom line is that wire line market could have been $2,635 million rather than $2,600 million as actually recorded. The success and growth of FEWD equates to about a 1% difference (yet this is within the margin of error in the estimation of the market) in wire line revenues at this time.

Copyright 1991 Oil & Gas Journal. All Rights Reserved.