Author: Kevin Schiller, Senior Analyst in IHS Markit’s Capital Equipment group
In 2015, the market for low-voltage motors declined by the greatest percentage since the global financial crisis approximately 7 years earlier. The contraction was attributed to weakness in process sector markets, which suppliers initially anticipated would stabilize in late-2017. However, through the first three quarters 2017, machinery sales into the oil and gas sector have continued to decline, despite a slow recovery of capex spending in the sector.
The oil and gas sector is estimated to account for the majority of the global decline in demand for low-voltage motors in 2016, marking the second straight year that motor revenues have fallen short of the year prior in this market. This trend is especially relevant, given that oil and gas motor revenue growth typically outpaces that of the overall low-voltage motor market, and accounted for the second-largest market for motors in years past.
Brent and WTI spot prices started falling in mid-2014, reaching their nadir in early 2016. At the time of this writing, oil prices have since regained approximately one-third of their value lost from 2014 to 2016. While this has spurred some recovery in upstream investment, motor revenue is estimated to have declined further. One factor in the delay of machinery investment recovery can be attributed to the use of stacked equipment – mothballed machinery from decommissioned or idle operations. Initial rig count increases in mid-2016 almost exclusively utilized warm-stacked equipment, with spending primarily limited to services designed to extend the lifecycle and increase efficiency of machinery in production. Increased use of process automation and performance monitoring in North American upstream operations has increased oil well output by approximately 20%, while also shortening the timeframe for drilling and completions by 10-20%. Improvements to production efficiency and shorter well lifespans have further reduced demands for upstream machinery, as upstream companies continue to prioritize lean operations.
Oil services companies with long-term commitments to field developments have also adopted new strategies to curb spending while commodity prices are low, without losing the ability to scale up quickly should prices improve. Some drilling has continued without completing the wells, which will delay investments in upstream production equipment, such as pump jack motors, until oil demand returns to a level that can support additional supply. Others have opted to rent upstream equipment deployed on skids, as opposed to purchasing new equipment. These trends are forecast to prolong the recovery of demand for low-voltage motors; oil and gas low-voltage motors revenue in 2020 is forecast to be approximately 25% lower than that of 2014. The decline has seemingly created a permanent shift in the landscape of the motor market, as revenue from motor sales to the food and beverage market has now surpassed that of the oil and gas market.
On a positive note, these strategies have helped the North American oil and gas sector to adapt to its role as a global swing producer. Due to improvements in automation implementation, well design, and attention to profit margins, the North American market for low-voltage motors is expected to grow more quickly than other regions in long-term forecasts through 2020.
There are also more positive outlooks for mid-stream and down-stream investments, though several global oil services companies straddle these sub-sector lines. In mid-stream markets, new support behind pipeline transportation should buoy oil and gas machinery investments slightly, though most processes in mid-stream markets favor medium-voltage machinery. Down-stream markets for low-voltage motors are also poised for favorable growth through 2020. Refineries have reportedly been operating at close to full capacity since OPEC lifted its production limits, and are overdue for upgrades and maintenance. This presents yet another opportunity for services growth in the oil and gas sector, with positive implications for retrofit machinery sales.
For purposes of this article, low-voltage motors are defined as integral horsepower motors at or below 690 Volts, with medium-voltage motors encompassing all motors above that voltage rating.
Kevin Schiller is a senior analyst in IHS Markit’s Capital Equipment group. For more information regarding IHS Markit’s 2017 low-voltage motor research or upcoming IE4 motor research, please email firstname.lastname@example.org or visit technology.ihs.com