Synopsis

By now it’s a familiar tale: That sharp drop in oil prices in July is producing ripple effects across the oil services industry. Previous reports of stabilization in the Bakken workover market have now given way to declining demand once again. The result is the oversupply of regional workover capacity has gotten worse in light of weakening demand and contractors have started a new round of stacking equipment and laying off personnel. More telling is the deteriorating outlook for work prospects in the current price regime. It may take $60 oil before additional workover units are needed. Hourly rates had begun dropping again as Hart Energy conducted its telephone survey in mid-August, though the average reported rate for the benchmark 500 series workover unit was only down $10 per hour to $375. On average contractors expect another 6% drop on average in hourly rates over the next 90 days. Although Bakken operators had been cutting into the backlog of drilled but uncompleted wells earlier this summer, partially to meet North Dakota’s one-year requirement for completing wells, some respondents note operators are slowing completions once again. Watch for the next Bakken workover market report in November 2015.

Part I. – Survey Findings

Among Survey Participants:

  • Workover Rig Demand Declines Quarter-To-Quarter
    [See Question 1 on Statistical Review]
    ​All respondents said that demand for workover rigs declined in third-quarter 2015 compared to second quarter after the oil price fell into the $40s during the period. This is a change from the May report when a few respondents said demand had stabilized at low levels.
    • Mid-Tier Workover Company Manager: “Demand is definitely down in the Bakken.”
  • Oversupply Of Workover Rigs In The Area
    [See Question 2 on Statistical Review]
    ​All respondents concurred there continues to be an oversupply of workover rigs in the Bakken Shale area, similar to findings in earlier 2015 reports. Well service company respondents reported most contractors have stacked rigs within their respective fleets and several said they do not expect fleet utilizations to improve anytime soon.
    • Mid-Tier Workover Company Manager: "Until the oil price returns to the $60 level, I don’t see any reason for more rigs to go back to work."
  • Routine Maintenance Accounts For 66% Of All Work Performed
    [See Question 3 on Statistical Review]
    ​Routine maintenance on older wells accounts for 66% of all work performed among the respondent group, matching the 66% reported in May. Completions account for 29%, plug and abandonment (P&A) work accounts for 1% and standard workover accounts for 4% of all work performed. Several respondents remarked that completion work is likely to slow if the oil price does not recover into the $50 to $60 range as operators will delay completing wells.
    • Small-Tier Workover Company Manager: “Some operators are doing just enough to get by.”

Maintenance

Completion

P&A

Workover

70%

30%

0%

0%

75%

10%

5%

10%

70%

30%

0%

0%

80%

10%

0%

10%

30%

70%

0%

0%

65%

30%

0%

5%

70%

30%

0%

0%

Average 66%

Average 29%

Average 1%

Average 4%

  • Workover Rigs Used Most In Bakken
    [See Question 4 on Statistical Review]
    ​Six respondents use workover rigs 100% of the time, but one operator is using coiled tubing units. A few respondents mentioned that coil could buckle in long laterals that characterize many Bakken wells.
    • Mid-Tier Well Service Manager: “We’ve heard of some issues that occurred when coil was tried in some horizontal wells. The reach was so long the coil did not perform well.”
  • Hourly Rates Hurting
    [See Question 5 on Statistical Review]
    ​The hourly rate for the popular size 500 HP series is $375 per hour on average, which reflects the discount contractors are giving in response to the lower oil prices and slightly less than the $385 per hour reported in May. See Table I for average hourly rates.
    • Mid-Tier Well Service Manager: “There is absolutely no catalyst for rates to rise in this market. We are just hoping that most of the concessions have been put in place and prices will hold now.”

Table I. – Average Rates For Certain
Workover Rig Sizes In The Bakken Shale

Rig Size (HP)

Average Rate

300 HP Series

$220/hour

400 HP Series

$270/hour

500 HP Series

$375/hour

  • No New Competition In Downcycle
    [See Question 7 on Statistical Review]
    ​All respondents reported they have not seen any new competitors enter the market during the current downcycle.
    • Mid-Tier Well Service Manager: “This is not the time to expand operations or move equipment around.”
  • Industry Copes With Latest Oil Price Drop
    [See Question 8 on Statistical Review]
    Respondents are more pessimistic about the near-term outlook for workover activity, which reflects a change in sentiment from the May report when survey participants seemingly were preparing for an upturn. A few respondents remarked that some operators are delaying drilling and/or completing wells. Furthermore, workover service companies continue to cut or maintain costs. A few have laid-off more personnel when more workover rigs went idle during the quarter.
  • Some Well Completions Delayed
    [See Question 9 on Statistical Review]
    ​Four respondents reported that some oil companies are delaying completing wells until oil prices recover, but three reported completions are ongoing as earlier planned. While none of the respondents could estimate the current backlog of wells being drilling but not completed, most agreed the backlog began to grow again during the past month after the oil price fell to $45.
    • Large, Independent Operator: “Some completions are being delayed as we elect to conserve capital during this low price environment.”

End Survey Findings

Survey Demographics

H A R T E N E R G Y researchers completed interviews with seven industry participants in the workover/well service segment in the Bakken Shale area. Participants included three oil and gas operators and four managers with well service companies. Interviews were conducted during early to mid-August 2015.

Part II. – Statistical Review

Workover/Well Services

[Bakken Shale]

Total Respondents = 7

[Oil & Gas Operators = 3, Well Service Companies = 4]

1. Do you expect demand for workover rigs to grow, remain the same, or shrink in third-quarter 2015 compared to the second quarter?
Shrink: 7

2. Would you characterize the supply of rigs in your area as excessive, sufficient, or insufficient to meet third-quarter 2015 demand?
Excessive: 7

3. Looking at your slate of well service work—on a percentage basis—how much of it is workover vs. routine maintenance vs. plug and abandonment (P&A) vs. completion work?

Maintenance

Completion

P&A

Workover

70%

30%

0%

0%

75%

10%

5%

10%

70%

30%

0%

0%

80%

10%

0%

10%

30%

70%

0%

0%

65%

30%

0%

5%

70%

30%

0%

0%

Average 66%

Average 29%

Average 1%

Average 4%


4. Which type of well service equipment is gaining share in completions—coiled tubing CT) units or workover (WO) rigs?

All work performed by workover rigs:

6

Using more coiled tubing units:

1


5. What size (horsepower) workover rigs do you own? What is a representative rate for this size workover rig in your area?

Rig Size (HP)

Average Rate

300 HP Series

$220/hour

400 HP Series

$270/hour

500 HP Series

$375/hour

[Rates shown are an average rate among all respondents in the category and include current price discounts.]


6. Do you expect workover rig hourly rates to increase, remain the same or decrease over the next three months?

Flat (0%):

3

Down 10%:

3

Down 15%:

1

Average:

Down ~6%


7. Have you noticed competitors from other regions entering your area?
No: 7

8. What strategies are companies putting in place to cope with the low oil prices?

Slowing drilling and completions:

3

Continue to cut or control costs:

2

Laid-off some personnel after idling rigs:

2


9. What are you seeing in terms of the number of wells being drilled, but not completed?

Some operators slowing completions:

4

Operators continue to drill and complete wells as planned:

3


End Statistical Survey