How Are Falling Oil Prices Impacting the Condition Monitoring Market?—Bracing for an Uncertain Future

Published: 28 Mar 2016

We've all heard the horror stories: oil prices declining by 70%, capital expenditure (CAPEX) declining by 25-50%, rig count declining by 80%. Globally, the oil and gas industry is reeling, with oil prices breaching the $30 per barrel mark. There are winners and losers. Energy exporting nations are facing significant revenue shortfalls while consumers in many importing countries are likely to pay less for heating, petrol, diesel, and other petroleum products.

What impact will falling oil prices have on the global condition monitoring equipment market? Frost & Sullivan spoke to leading vendors of condition monitoring solutions about their views on this turbulent situation.

Frost & Sullivan has conducted extensive research in the field of condition monitoring. Its latest analysis of the market was published in 2015, with research findings predicting that condition monitoring vendors could anticipate stable growth. Research indicated that the market grew 4 to 6% in 2014; although there were concerns about the global economy, turbulent oil prices, and other geopolitical factors, pockets of opportunities helped sustain the market. But how has the market fared since then? Given the dramatic nosedive in oil prices, it would be fair to assume that the condition monitoring market has met a fate similar to industries reliant on the oil and gas industry. Not quite so, according to some industry experts.

Still Pushing Through...

According to Juli Iacuaniello, strategic marketing analysis and planning manager at SKF Services and Solutions, the company has yet to feel the full force of the downturn. "To date, we haven't seen any impact of the declining oil prices on our business. Perhaps in the medium-long term we will, but most of our business is with downstream customers, who still face same requirements to operate efficiently and safely. Low oil prices would mean low investment, but we think that will be harder felt in the greenfield and exploration. OPEX [operational expenditure] may be squeezed, but we also see this as an opportunity for customers to improve productivity through technologies like online condition monitoring systems or operator-driven reliability."

Much of this has to do with the growing awareness of the benefits of condition monitoring. Customers have understood the benefits of continuous monitoring and analysis of assets and of making informed decisions based on the component's behavior or its vibration signature, rather than arbitrarily replacing an asset's components over a predetermined period. The drive toward predictive maintenance has gathered steam, compared with preventive maintenance and other walk-around monitoring programs.

This sentiment was echoed by Jeremy Frank, president of KCF Technologies. "Oil and gas is at least a third of our business and it's the fastest growing. The reason we're successful is because we have some very forward-looking, innovative customers who are seeing this as an opportunity to make their operations more efficient and more predictive, reducing their operational costs in a strategic targeted way." With SmartDiagnostics®, KCF Technologies specializes in innovative, cost-effective, wireless predictive maintenance solutions and has been a success story in the condition monitoring world over the past few years. "Our customers are taking a different perspective and investing in technologies to reduce operational costs," Frank said. "The impact has been phenomenal: We are growing at over 400%, and our customers are saving 10 times more than what they spend with us."

...But the Challenges are Undeniable

While the outlook remains predominantly positive, things have dramatically changed following the unprecedented decline in oil prices. "Oil and gas is still spending on condition monitoring, but reports state that the change in oil prices is hitting all CM suppliers, particularly those that derive a lot of their business from machinery OEMs and engineering, procurement, and construction companies [EPCs]," said Steve Sabin, director of marketing and product management at SETPOINT Vibration. "With oil at $30 a barrel, many projects are being shelved. Machinery OEMs are not selling as many machines to the oil patch, and this obviously trickles down to those selling probes, monitors, etc., to those OEMs."

Frank had a similar perspective. "We mostly work in the Marcellus and Utica shale basins, and a majority of the companies that are not successful are already bankrupt, out of business, or dramatically scaled back. The companies that have been successful are barely surviving; asking them to spend more money on operational improvements is a very difficult thing to do no matter how good the technology is."

Preliminary findings indicate that, contrary to original Frost & Sullivan projections, the condition monitoring market in the oil and gas industry declined in 2015 — particularly in upstream applications. Downstream, however, is likely to remain stable in the short term. There has been some squeeze on OPEX but nothing as significant as CAPEX.

A Few Bright Spots

Frost & Sullivan's prediction that hardware will no longer be the most critical selection criterion remains true. Customers are looking for a more holistic approach that combines hardware, software, and services. Traditionally, the role of condition monitoring hardware companies has been limited to providing sensors, monitors, and the machine protection system. This role has changed over the last few decades as customers look to do more with the data collected from their assets with the help of a long-term partner.

"We have a great sensor and software," Frank said. "But we say all the time: ‘It's not about the sensor.'  The sensor doesn't actually accomplish anything. It's all about partnership and team building with the customer so their team can use the data in an effective manner."

This has been the most important driver for success at KCF Technologies. "That's the key thing that differentiates us from other companies that provide just hardware and sensors," he said. "We are immersed in our customers. We travel to their sites and train them. And we work with their engineers, operators, maintenance and safety teams hand-in-hand to make the technology work properly. It's not so much about the data or sensors, it's about training and enabling the people in our customers' workforce to take action on the data."

Because of an aging workforce and the lack of skilled personnel, customers are turning to their hardware providers for additional support. Opportunities in design, installation, maintenance, data collection, and diagnostic services have created alternate revenue streams for condition monitoring equipment companies.

Another positive spin on this is that in situations where efficiency and productivity become the most critical operational criteria, condition monitoring can play a key role in delivering cost savings.

"The oil and gas industry is tightening budgets and is laying off large populations of employees. It is too early to know how fewer people will impact condition monitoring," Sabin said. "It may mean they have to buy better tools so that fewer people can accomplish more; it may also mean that fewer people have to simply make do with their existing tools."

Another way that companies are riding this downturn is by diversifying their customer base rather than relying entirely on the oil and gas industry. Power generation, automotive, and other process industries are all energy intensive and are thriving at the expense of oil and gas. The lower price of oil gives them a competitive advantage and puts them in a better financial position, which means additional budgeting for maintenance and condition monitoring.

"SETPOINT's strategy has been to ensure that we are not overly dependent on oil and gas, and have a diversified customer base that includes power generation, water treatment, etc.," Sabin said. "While demand in the O&G sector has not dried up, it does underscore that there are still opportunities outside the oil and gas patch, and the lower cost of energy and feedstocks may give those other industries a better financial situation than under high oil prices."

Conclusion

Are condition monitoring providers concerned about the current market situation? Of course, but is there widespread panic? Not quite yet. Condition monitoring companies are quietly confident that things will improve. Exploration and production companies may stop drilling for 12 months, and oil corporations may cut down on their maintenance budgets, but not all companies are going to go bankrupt even if the price of oil goes down to $15 per barrel. For the time being, the wait-and-see approach is popular even as condition monitoring companies continue to cater to their other end markets and brace themselves for evolving technologies and the service business models of the future.

 

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