Part II: North American Pressure Pumping Trends, International Implications
Recent Trends in the North American Pressure Pumping Market Have Serious Implications for Domestic and International Operators and Suppliers
This article is the second in a series of three articles on recent trends in the North American pressure pumping market and their implications for both North American and international operators. The author, Alexander Robart, is a Principal with PacWest Consulting Partners, a boutique strategy consulting firm based in Houston that works with oil and gas operators and suppliers to better understand and develop innovative solutions to strategic and supply chain issues.
The North American land market has seen a major increase in drilling and completion activity, along with a shift from gas to liquids-rich unconventional formations, which require different products and services from the supply market. These trends have led to shortages in pressure pumping equipment, proppant, logistics and storage infrastructure, chemicals, and labor.
Pressure pumping equipment manufacturers are currently experiencing order backlogs of up to one year for key components of the pressure pumping fleet, particularly pumps, transmissions, power ends, and fluid ends. Pumping unit manufacturers who outsource most of their component manufacturing have experienced major challenges obtaining key components, leaving those who have retained all or most of their equipment manufacturing and integration capabilities in-house at a competitive advantage.
The rapid expansion of hydraulic fracturing across unconventional plays has increased the demand for proppant to unprecedented levels. Worldwide proppant sales in 2010 were nearly double the previous demand peak in 2008 and proppant producers have struggled to keep up with demand. Many of the largest domestic producers were completely sold out of product in 2010.
Several key unconventional plays, particularly the Bakken, have seen shortages in products due to limited logistics infrastructure. Fracing a typical well in the Bakken currently requires an average of 2-4 million pounds of proppant, the equivalent of 15 railcars per frac, on average. The existing rail infrastructure is simply not adequate to transport this much cargo into the region. Many suppliers have experienced temporary shortages of key fracing chemicals, particularly guar-based chemicals, which are used as gelling agents in linear and crosslinked gel fracs.
In response to increased demand, suppliers are increasing capacity for all related products and services. The unprecedented market demand for proppant has created opportunities for new entrants in the market, in both the US and Canada, with several entrants attempting to market “non-traditional” sources of proppant, such as sand dredged from rivers. There have been several new entrants to the raw sand market in the US and many foreign entrants into the ceramics market, particularly from Russia and China. Some operators have begun using sand that does not meet API standards, rather than leave wells uncompleted due to lack of API-grade sand proppant.
New investments into transportation infrastructure have started to add transport capacity. Several new firms have recently opened new transload facilities and additional firms have announced plans to develop and operate multi-user rail terminals designed specifically with the needs of the oil & gas industry in mind. In response to shortages of guar-based chemicals, pressure pumping companies have occasionally encouraged operators to switch to pricier substitute products.
Most importantly, pressure pumpers have also been expanding new capacity, building new pressure pumping fleets. However, in an unprecedented change from recent upmarket cycles, the vast majority of pressure pumpers are now only committing to fleet newbuild programs under dedicated, long-term arrangements with operators that include minimum volume commitments.
Historically, North American operators have typically contracted for pressure pumping services on the spot market. This offered them tremendous flexibility to satisfy pressure pumping requirements while bearing little to no financial risk themselves. However, over the last two years, the market has shifted, and the majority of pressure pumping fleets are being contracted under long-term arrangements with operators. Increasingly, these arrangements include minimum monthly volume commitments, requiring operators to share some of the financial risk with pressure pumpers.
The capacity demands for a new pressure pumping fleet are far higher than in the past, with recent fleets averaging 15-25K horsepower, depending on the play in which the fleet is designed to service. The cost of a new fleet averages between $20 and $30 million, a major capital outlay and a driving reason for suppliers to be more cautious about committing to newbuild programs without some sort of customer commitments to mitigate financial risks. The pressure pumping market seems to be evolving to more closely resemble the land rig market, with long-term commitments the norm.
This new supplier caution has meant that capacity has increased more slowly than it would have otherwise if suppliers were simply building new fleets destined for the spot market. Some experts believe the rig count is now being held back by a lack of pressure pumping capacity, an unprecedented change in market dynamic.
Inherent in all these market changes, is a shift in the relationship between operators and pumpers. Pressure pumpers now exercise more power over operators and are forcing operators to share more risk.
The third and final article in this series will address the implications of recent changes in the nature of the North American pressure pumping market for international operators and suppliers. If you have questions regarding any of the contents of this article, please feel free to reach out to the author at arobart@pacwestcp.com.
Read Part One of this Series HERE