The market for industrial valves will grow by 16 percent from 2015 to 2019 at oil prices of $80/barrel during the period. At $40/barrel, the growth will only be 9 percent. These are the latest forecasts in N028 Industrial Valves: World Market published by the McIlvaine Company.
There are a number of variables which will determine the market growth for valves. New insights are continually generated which justify changes in the forecasts. The Iran nuclear agreement is just one example. The plunging economy in China is another. However, the most significant development recently is the plunge in oil prices to $40/barrel.
The industrial valve market is led by oil and gas which represents 15 percent of the present market. However water and wastewater, power, refining, petrochemical and other industries account for 85 percent of the market. The impact of future oil prices on the market can be best predicted by estimating the impact on the individual segments.
Oil and gas can be divided into two segments. The aftermarket and routine purchases for small projects represent two-thirds of the total or 10 percent of the present total pump market. The longer term large project revenues represent only 5 percent of the current market. If the price of oil were to continue to remain at $40/barrel through 2019, revenues in this segment would shrink over the period.
The chart shows percentages of the present 2015 market for the year 2019. At $40/barrel oil the long range valve product revenue from the oil and gas large project segment would shrink by 60 percent from 5 percent of the current market in 2015 to an amount in 2019 which is equivalent to 2 percent of the 2015 market. On the other hand, the oil and gas aftermarket and market for small projects would grow slightly during the four year period. In fact, the market for pipeline valves will be positively impacted as low cost oil and gas needs to be moved to more places.
The petrochemical market will grow faster at $40 oil. Municipal water and wastewater will be unaffected by the fluctuation in oil prices. Lower prices will result in more gasoline being consumed and more oil being refined. The power market will be impacted by greater use of gas turbine combined cycle power plants but total revenues for valves in the power industry will not be impacted greatly by fluctuating oil prices.
McIlvaine will continue to assess the likely changes in oil prices based on the following factors:
Some of these developments are more predictable than others. The low oil prices lead to lower extraction activity which eventually leads to shortages and higher prices. On the other hand, wars, oil spills and earthquakes cannot be easily predicted. As a result, there will be the need for continuous changes in the forecasts to take into account the surprises.
- The break-even cost for a new well
- Hydraulic fracturing break-even point is $30 to $50/barrel equivalent based on improved management practices and the extraction of more product from existing wells.
- Oil and tar sands projects break even at $65/barrel.
- Subsea is more expensive.
- New technology developments
- Bechtel experience with coal seam gas to LNG in Australia indicates lower break- even costs than subsea extraction.
- China coal to syngas and chemicals could be an alternative which is more than competitive at $40 oil. McIlvaine has recommended marrying the two stage (HCl/SO2) scrubbing along with conventional hydrochloric acid leaching to extract rare earths and generate byproduct revenue.
- The slowdown in China could impact demand as could economic problems in Greece and other countries.
- Demand is a function of industrial activity. There is little equipment needed to extract Saudi oil. On the other hand, over 2,000 companies rely on the Alberta oil sands market for their revenues. The greater the industrial activity the greater the oil demand.
- Saudi Arabia could choose to restrict production. In many ways the situation is analogous to the gold in Ft. Knox. You could sell it at any price and generate positive cash flow. However, it is a precious and finite resource which is important to future generations.
- Market driven companies will typically be reactive rather than proactive and will only increase drilling after oil prices rise to a level to make drilling profitable.
- Political developments
- Lifting the Iran embargo on oil exports.
- Russian activities in the Ukraine and elsewhere.
- Chinese efforts to manage the economy.
- Uncertainties in North Korea, Greece and Venezuela.
- Regulatory initiatives
- Climate change regulations.
- Pollution control requirements for hydraulic fracturing.
- Traumatic events
- Major oil spills.
- Large meteorite impact, earthquake or major volcano eruption.
Picture: Effect of oil price on valve market 2015-2019 (Image: McIlvaine Company)