PacWest: Light At The End Of The Tunnel For Fracing

As of late, the stats have not been pretty. By year-end 2012 the U.S. rig count had dropped significantly, and U.S. hydraulic fracturing capacity utilization averaged 75%.

But a recent study by PacWest Consulting Partners as part of its “PumpingIQ” report indicates that the worst may be in the past. During a conference call to reveal the findings of the study, Christopher J. Robart, a principal at PacWest, said that his group’s research indicates that the end of 2012 was a trough, and the last eight weeks or so have indicated a modest increase. “Net/net, we think the total rig count will be down 6% in 2013,” he said. “But the horizontal rig count will only fall by 1%.”

As is often the case in unconventional plays, a falling rig count does not necessarily mean reduced activity. The Eagle Ford shale in Texas is a prime example of a play where a dropping rig count is mostly attributable to better drilling efficiencies, i.e. more wells drilled per rig. This will put fracing economics in a better light, he said.

PacWest forecasts that 300,000 hp will be added to net frac capacity this year, less than some of the more optimistic estimates of 500,000 hp to 600,000 hp. This will drop 2013 capacity to 15.7 MMhp.

Breaking down this capacity, the big four – Schlumberger, Halliburton, Baker Hughes, and Weatherford – are actually decreasing capacity, while small and medium players are aggressively adding capacity and gobbling up more market share. For many of these players their 4Q 2012 earnings were better than expected. Robart chalked this up to “a combination of luck and strategic customer positioning.”

Supply

The report indicates that frac supply will continue a modest drop of about 5% over the 2012 average. This will be temporary, though, with supply ramping up 4% in 2014 compared to the 2013 forecast.

“In terms of capacity vs. price index, we see the light at the end of the tunnel,” he said. “The index is starting to stabilize. Most of the big price decreases have already happened.”

There are, of course, different fundamentals when studying dry gas vs. liquids. While gas prices seem to have hit a plateau, major operators in dry gas plays like the Fayetteville and Haynesville shales report continued softening in the market. Robart anticipates, however, that this will stabilize by year-end 2013.

Technology

Horizontal drilling and hydraulic fracturing have already played a key role in shale development. The next big trend, according to the PacWest report, is dual-fuel power. The idea is to convert engines on rigs, pumping units, and onsite generators to run on a combination of diesel and natural gas. The natural gas might come from CNG and LNG or from pipelines and the field itself. Several companies offer converter kits that allow engines to run on a variety of fuels such as ethane and propane, providing more flexibility for field gas applications. Other companies are pursuing technologies that will allow the engines to run on almost 100% natural gas.

While PacWest researchers are bullish on this technology, they warn of overly optimistic reports that base their assumptions on simplified economic analysis and failure to appreciate deployment challenges. For example, the U.S. has very few LNG supply facilities. CNG requires a large number of truck trips to transport the fuel given its low energy density, adding to costs. Pipelines often are not within proximity of the operations, and field gas needs to be produced consistently and cleaned so that it can be used in the equipment.

Overall, the report estimates that natural gas substitution rates are likely to be around 50%.

Trends and implications

Overall, the report indicates that leverage is shifting significantly from service companies to E&P companies. “They’re in control of the terms and structure of the contracts,” Robart said. “For the pumpers some financials are strained, but these are likely to improve as utilization improves and companies get their costs in line.”

Contact the author, Rhonda Duey, at rduey@hartenergy.com.