John Spears: Advisor to the “Oil Patch”

Spears’ Background

Spears is president of Spears and Associates, Tulsa, OK, a market research firm that specializes in the oil and gas industry, primarily for the upstream sector (drilling and production).

Spears’ father founded the business in the 1960s. Spears went to college to pursue industrial engineering, then studied business in graduate school, but his first job was not with his father’s firm. After graduating, Spears went to work as a consultant with a major accounting firm, a job that launched a long career in consulting.

Spears remembered that, at the accounting firm, “I was a generalist, with every project in a new sector and a new city.” After a couple of years of focusing broadly, he decided he could contribute more by looking at a single area of interest and returned to Tulsa in the early 1980s to join Spears and Associates.

Today, Spears performs in-depth study and analysis of the upstream oil and gas sector.

Great Gains in Recent Years

Spears noted that his field has been particularly challenging and fascinating in recent times as new technologies, especially horizontal drilling, have resulted in significant increases in oil and gas production in the U.S.

Since oil- and gas-bearing geological formations tend to run horizontally, they could be just 50 feet high but thousands of feet wide. Instead of going straight down, today’s methods include drilling in a more horizontal direction, which allows access to much more of the oil or gas than conventional (vertical) drilling. Meanwhile, hydraulic fracturing (fracking), is being used to gain better flow.

The rocks in oil and gas formations have much porosity, which holds the oil and gas. However, the rocks and formations are not permeable – the oil or gas does not flow naturally. When you fracture the shale and make channels to the well bore, the oil or gas moves more smoothly. With horizontal drilling and fracking, wells produce at much high rates then with conventional drilling. This has had two effects on the valve industry, according to Spears.

First, because wells are more productive, fewer Christmas tree assemblies (which include valves and related equipment) are needed, which decreases demands for these conventional products.

Second, because these newer methods require tougher equipment, these higher-production wells have pushed valve demand toward the premium end of the market. Valves with higher pressure ratings and larger sizes are now needed in the upstream sector.

Overall, “We’re setting records every day for oil and gas production in the U.S., so we have to produce more pipeline and processing plants,” said Spears. This means increased demand for valves in the midstream (transportation, storage) and downstream (oil refineries, petrochemical plants, natural gas distribution, etc.)

“The outlook [for valves and oil and gas] is that we will continue to see substantial growth in U.S. production – several more years of growth, at least until the middle of the next decade,” he forecast.

Today’s Main Issue: Flowback

As beneficial as horizontal drilling and fracking are to production, they present their share of challenges, especially regarding the produced wastewater.

The newer horizontal wells are larger than those used just several years ago. Back then, a new horizontal well might extend 3,000 to 5,000 feet. Now, that distance might be 8,000 to 12,000 feet. Water usage goes up accordingly, which means that industry today must handle billions of gallons of wastewater.

After fracking, much of the water injected to produce the fracturing returns as flowback water contaminated with salts, minerals and other materials. Because of environmental concerns, regulators have tightened rules about disposing of this flowback water. Although most operators aim to be good corporate citizens, the water has to go somewhere, and the concerns are real.

A lot of fracking flowback water is disposed of by pumping it into geological formations as far as one or two miles under the ground. This practice has the potential to produce seismicity (earthquakes). The industry is now facing the challenge of how to reinject water without producing events.

Spears noted that is why so many operators today have water experts on their staff.

What’s New with Valves

Spears believes that one of the most exciting current developments includes the newer, smarter valves as well as valves that offer more features, such as sensors. This is particularly true over the past decade in the upstream sector where real-time monitoring and control are now common.

Still, the majority of what’s used include some old standards.

The oil and gas valve industry is a century and a half old, so its technology is pretty mature. Gate valves, ball valves, check valves are still the common valves, although a change in the mix has occurred because of higher oil production, observed Spears.

He noted that much of the demand in recent years has resulted because of increases in gas production, which has been setting records since the advent of horizontal drilling (about the early 2000s for gas). With similar innovations now more common in oil drilling, which didn’t see horizontal drilling and fracking until about 2010, similar growth is likely to occur. Oil production has doubled in the last six to eight years, so demand for valves used in that production will follow.

Newer Opportunities

Increased oil and gas production presents new opportunities for valve suppliers to break into the market, said Spears.

Companies that make up the modern oil and gas industry range in size from small, regional operations to national companies to multinational businesses. Meanwhile, every equipment and service company has its own toolkit for the oil patch, and Spears suggested that newcomers to the industry learn who the different sectors are, how they operate and how they think because a wide range of approaches to equipment procurement also exists.

“Valve manufacturers that have new products to introduce to oil and gas operators in the upstream sector need to approach the field divisions,” he recommended. “Oil companies often push the decision-making process down to the field level. To sell to the upstream oil and gas sector, talk to the production department for that particular oil- or gas-producing basin.” The district level production department likely will be the one to give the thumbs up or down on a new product, and each district is likely to have its own engineering and purchasing departments as well as its own operations staff.

“The oil patch has always given much authority over supply chain decisions to the field staff,” said Spears, and the field staff generally want to source locally, which presents a geographic challenge to suppliers.

To put the situation into perspective, Spears explained that, of the 24,000 to 25,000 new wells that will be drilled next year, the top 25 operators will drill half. About 2,000 operators will drill the rest. Also, there are currently about one million producing wells in the U.S., run by about 8,000 operators.

Ups and Downs

While the oil and gas industry is doing well these days, Spears reminded us that historically, this has been a cyclical industry and that the current situation does not look much differently than previous boom times.

“The industry has been chasing production growth at the expense of profitability,” he observed. “The idea is that we grow by producing more and assume that will mean we make more money.”

However, when gas or oil prices are high, much money is spent on drilling wells, which creates an oversupply situation. Eventually, prices crash. To help avoid consequences of this boom and bust cycle, supply companies need to pay attention to their own profitably and how they spend their money overall. Spears concluded, “My hope would be that taking this longer view would reduce the swings.”

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Barbara Donohue is a mechanical engineer and contributor to VALVE Magazine.