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

Part I

This article is the first 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 last year has seen two major trends in the North American land market:

1)     A general increase in drilling and completion activity

2)     A shift in activity to so-called liquids-rich unconventional plays that contain high proportions of oil and natural gas liquids

Drilling activity has increased significantly from its nadir in 2008 and 2009: the US land rig count has steadily increased from roughly 900 rigs in early May 2009 to 1,800 rigs in early May 2011.  Although the rate of increase is expected to slow over the next few years, the rig count is expected to continue to grow.  Macquarie forecasts an average US land rig count of 2,089 in 2014, a 24% increase from the expected average 2011 US land rig count of 1,680.  As a result of this increase in drilling activity and the increased prominence in the North American land market of unconventional resource plays that demand hydraulic fracturing services, the market for pressure pumping services has seen unprecedented growth.

Over the last 12-18 months, the depressed price of natural gas and the relatively high price of oil have driven operators to dramatically shift capital outlays and drilling and completion activity from assets that produce primarily dry gas to oil and natural gas liquids-producing assets in an effort to improve economics. Perhaps the most extreme example of this trend is Chesapeake Energy, which has dramatically pivoted from investing only 10% of capital in liquids assets in 2009 to a forecast 75% in 2012.  The oil rig count finally overtook the gas rig count in early April 2011, up from a relative oil/gas rig count of 20%/80% as recently as May 2009.  Natural gas prices are expected to remain depressed for the immediate future therefore drilling activity is expected to focus on oil and liquids-rich plays.

The dominance of oil-focused drilling and completion activity has significant implications for the North American oil and gas supply chain as drilling, completion, and export methods for producing hydrocarbons differ significantly for oil versus natural gas.  Different products and services are required to differing degrees to drill and complete oil wells.  This shift has occurred within a relatively short time frame, providing little time for the North American supply chain to keep up with both the increase and shift in the nature of demand.

These conditions of high demand and tight supply are rippling through the supply chain, causing supply shortages and price inflation, particularly in completions.  So far, supply has been unable to keep up with the demand for new pressure pumping capacity.  Additionally, there is a considerable backlog of wells that have been drilling but are still waiting for completion.  Halliburton’s CEO estimated the total number of uncompleted US land wells to be 3,500 during the company’s recent 2011 Q1 earnings call.  Forecast 2011 US land well completions simply demand for pressure pumping capacity that is well above the average expected pressure pumping capacity.  In an analysis recently undertaken by PacWest, we estimated that the theoretical pressure pumping capacity utilization during 2011 would be 131%, indicating a significant undersupply of pressure pumping capacity in the market.  When the current completions backlog was taken into account, the picture became even bleaker, with theoretical capacity utilization estimated to be 140%.  This indicates that operators will continue to face a tight market for pressure pumping services across the country and escalating prices, with no immediate relief in sight.

In key liquids markets, particularly the Bakken and Eagle Ford, arguably the two hottest markets in North America, supply chain constraints are exacerbating the market and holding back completion activity; shortages in pressure pumping equipment, proppant, logistics and storage infrastructure, chemicals, and labor are key challenges.  These delays have major implications for operators and suppliers.

The next article in this series will address how North American operators and suppliers are responding to the evolving market and how the relationship between operators and pressure pumpers is shifting. 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.