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An article written by Chris Robart, one our Principals, was published in the Winter 2012 issue of the IAEE (International Association for Energy Economics) Energy Forum.  The article concludes that higher water requirements in the development and production of shale resources make lifecycle water management scenarios, including water treatment and recycling, more attractive than conventional approaches to oilfield water management.

The paper is based on work that we have done for a number of leading independent E&Ps and the data and analysis in the paper is based on a simplified version of analysis that PacWest conducted for a client that is active in the Eagle Ford play.  The paper and the analysis that it is based on carries major implications for both operators and service companies active in the water management space.

You can download the full article here.

Welcome to the new home of PacWest Consulting Partners!  We’ve spent a lot of time over the last couple of months developing this new website, which is, frankly, long over-due.  The development process required us to really step back and think about who we were as a firm and reflect on the clients that we’ve served over the last few years, particularly the last 18 months.

The resulting website that you see here was designed to provide a much more comprehensive view of our range of strategic and advisory services, as well as highlight our range of market intelligence products.

We launched our product business roughly 9 months ago based on our own frustrations with research/resources available in the market. Our offerings have evolved since initial launch, based largely on subscriber feedback.  “Actionable intelligence” is our mantra when it comes to delivering value to our clients, so we have consciously evolved our products into a set of highly actionable and tactical products that facilitate management decision-making on a day-to-day basis.

Additionally, we’ve tried to build a site that could also serve as a better platform for us to reflect on daily developments in North American and global markets. We will try to publish our thoughts and reflections regularly and provide some of the insights that we offer to our clients to a wider audience.

We welcome any comments you may have and look forward to engaging with you in 2012!

Alexander Robart, Principal

 

I came across an article on The Street on titled “Don’t Believe Water Companies on Fracking,” published in December, that reflected such a poor understanding of shale, fracing, and the the oilfield water management market, that I was compelled to post a detailed response.  I’m sure there were more productive uses of my time, but it was late on a Friday afternoon and I was having trouble getting motivated to accomplish meaningful work, so this detailed comment that follows was the result.

Debra,

There as some major issues with your market breakdown and characterization contained in this article.  I suggest you do some fact-checking and re-issue…

Cameron is not the leading player in the oilfield water treatment market, with 50% market share.  Cameron does have a smallish water treatment business, largely through its 2010 acquisition of Eagle Precision Products LLC; however it is a small player.  Cameron is a leading manufacturer of oil/water separation equipment though, but that is very different than producer and/or frac flowback water treatment.

Cameron IS a leading player in the oilfield Surface Equipment market, but has about one-quarter of the market.  FMC Technologies is the leader though, with a slightly higher market share in the range of 28%.  This market is largely made up of flow iron, frac equipment rentals, and wellhead equipment rentals; water treatment is generally not included in this market, though it does include frac tank rentals (tanks for temporary flowback water storage and transport)

You also need to be far more clear about what part of the oilfield water treatment market you are talking about and what segments each player competes in.  There are a number of unique segments of the oilfield water market: environmental services/consulting, water treatment chemicals, water treatment equipment, field treatment services/operations, water transport/hauling, and water disposal.

Siemens is a meaningful player in the water treatment equipment market, as is GE, who you have overlooked, but neither do much in the way of treatment operations in the field.  Veolia is the world’s largest integrated water treatment player, covering all segments of water treatment, but they are a high-end player so have limited market share.  Nalco is largely focused on chemicals, though has done some frac flowback treatment.  ITT/Xylem largely manufacture pumps and other industrial control and monitoring equipment.  Heckmann competes largely in water transport and disposal, and also offers frac tank rentals.

You’ve completely overlooked looked the three leading oilfield services players, each of whom have major water treatment businesses: Baker Hughes, Schlumberger, and Halliburton (in order of general integration, capabilities, and size of their businesses).

Your $2.5 billion total addressable market (TAM) figure is off the mark.  Most estimates put the market at closer to $8 billion TAM.

I also have issues with your statement: “… hydraulic drilling in the Marcellus shale area has been challenging as the geological formations there are different from other areas where the drilling hasn’t caused problems with water.”  However, I can understand how you might simplify the circumstances in the Marcellus down to that statement though.  Frac water tends to flow back in the Marcellus at a rate of around 30% (meaning 30% of water pumped downhole during a frac job flows back over a roughly 30 day timeframe), which is one of the highest rates of flowback of any of the shale/unconventional formations.  For comparison, the Eagle Ford in South Texas, one of the most active shale markets today, flows back at a rate of closer to 10%.  That means that the Marcellus simply has more water to deal with through some combination of treatment/recycling and/or disposal.  The challenge in the Marcellus is that due to the local geology there are very few disposal wells nearby (exactly 8, I believe), so rather than haul water long distances to disposal wells in Ohio, which is expensive, E&Ps have been forced to use treatment more heavily than most oil producing areas, simply due to the economics.  Additionally, far higher population concentrations in the Marcellus region mean that water handling issues have an impact on more people than in traditional oil producing areas.  Lastly, there is no such thing as hydraulic drilling; a well is first drilled and then it is completed (hydraulic fracturing is the major process that goes on during the completion phase).

The silver lining from the water issues in the Marcellus related to shale extraction activity is that it is now ground zero for water treatment innovation and the general water space is seeing more creativity and an explosion of new technology.  These new oilfield solutions will eventually make their way back into the general water treatment market improving water treatment economics around the world.

This interview was originally published on May 24, 2011 by Natural Gas Europe. The original version can be found here.

Providing services to both operators and suppliers (as well as to investors), Alexander Robart is a principal with PacWest Consulting Partners, which he describes as a boutique strategy and market intelligence consulting firm that tends to work with the oil and gas supply market, particularly with shale gas.

Attending Shale Gas Eastern Europe 2011 in Warsaw, Poland Mr. Robart provided an exclusive interview to Natural Gas for Europe.

While he said his consultancy was not yet active specifically in Poland, Robart reported that PacWest had already been doing some work with one of the operators who owned concessions in Poland. “We’re not doing work on their Poland concessions in particular, we’re working on the North American assets. We hope to gain more of their insights into the Polish  market.

“One of the goals to being here is to gain some on-the-ground knowledge that people here have. One person commented on the barriers to entry for suppliers and how Poland is still a pretty closed market, so even if the strategic decision-making is sound it’s not just a simple matter of saying ‘I am pressure pumper XYZ, I see an opportunity here, I want to be a part of this.’ You can’t just do that.”

Robart said he was looking to introduce such players to PacWest and its services as well as its recently launched Shale Gas Supply Market Research Service, which he contended provided a resource on the shale supply market that didn’t exist anywhere else.

Based on what he had heard from participants at the pre-conference day, Robart said some were just getting acquainted with unconventionals. “Some participants are at the early stages of learning what shale gas means, or even what E&P means.  ” If they want to play in shale gas they’re going to have to learn it.”

He continued, “One place to start is by purchasing some market intelligence, digging into the market to understand what the supply market is, who those players are that are going to help provide the services to you.”

“The amazing thing about oil and gas is,” he remarked, “the operators are obviously the ones who take the risks, put the capital towards the major investments, towards the developing assets, but it’s the supply chain that does all the work.  Roughly eighty percent of operator spend is on third party services and products with this massive and deep supply chain we have in oil and gas. So those are the guys who are really doing a lot of the work.

In shale gas in particular, with one of the key differences between conventional and unconventional being hydraulic fracturing, where it takes some specialized critical skill sets and products and services to make shale gas a reality, you really have to know who’s out there with those capabilities and who has the experience in North America to actually run the fracturing, knows the proppant, knows the chemicals – there’s lots of things that are very specialized that only North American service providers, at the moment, know how to do.”

It’s exactly some of that expertise that he believes PacWest can deliver to facilitate the unconventionals industry.

“Our point of view at PacWest is this: obviously when it comes to international shale gas development, the technical determination of whether or not oil/gas are present in the ground is critical,” explained Robart. “However, we do think second after that is the movement of supply chain into various markets and countries. So, we’re working with operators and suppliers to help facilitate and, particular on the supplier side of things, helping to build up strategies and give them the rationale to make the tough choice to bring assets into the country.

“Particularly for a medium-sized supplier who is not one of the big Four, who doesn’t have billions of dollars to throw assets into a country and take that risk – they need some more pushing, so I think we can play some role by working with the suppliers to help them analyze the situation and say, ‘You’re going to have to make a strategic bet here to get in early, rather than waiting because you won’t make any money if you wait until everyone else is there.’

While not yet present in Poland, Robart had a good sense of what was going on there.

“The land grab ended several years ago,” he recalled. “We’ve got the 11 major groups of entities who own acreage here and I think things are still pretty early stage and there’s a minimum guaranteed amount of work with these concessions and the associated well programs.”

Robart said PacWest had conducted a drilling program analysis, so players could know what the business would look like for the next three years or so until some programs moved from exploration to development phase.

“So there’s a market which is enough to provide for some people to move assets in and so far the only people to have assets here on the supplier side are really the big four, excluding Weatherford. So you’ve got Baker Hughes, Halliburton and Schlumberger who have assets in country; Baker’s in the process of moving assets into country, but there’s really no other intermediate or even large suppliers beyond that.

“Particularly in pressure pumping,” he continued, “I have heard rumors of one other player who’s one of the top five by capacity in North America; they’re not the big three, but one of the only ones who we may have heard of moving assets in country.”

Costs, he said, were unlikely to come down until everyone else started coming into the market. “Until those costs come down to a more economic level beyond the $13 million we’re seeing on a per well cost basis, you’re not going to see meaningful amounts of production up to the 1 BCF or 1 TCF everyone’s looking for. So we really think that the supply chain is really the critical factor that’s going to bring down those costs, to ramp up production.”

Robart said, that in terms of the supply economics for, for example, a pressure pumping company, its cost structure was driven by three things: the costs of the equipment, the consumables, and labor.

“So when there’s only a minimal guarantee of the amount of work, they’ve got to charge really high rates, particularly on the mobilization of those assets from location to location, because when you’re looking at a massive well development program in full production phase – in the Marcellus or Barnett, for example – these guys are drilling 100+well programs, so they’re running one [frack] after another, like a factory. That’s the whole flexible factory approach that people are talking about – you can afford to charge very affordable rates in between, because you’ve got tons of work guaranteed.

“But when you’ve only got – you’ve run one frack here in Poland so far – we’re going to run a few more probably in 2011 and probably more after that in 2012 – these guys have to charge really high rates per frack to make up their money and to justify the economics of bringing an asset in country.”

According to Robart, shale gas development in Poland was likely to be a lot easier than in Western Europe.

“I think we’re looking at some real challenges. Sweden and the UK have seen some protests against fracking, France has a de facto moratorium set up right now, pending the elections which are a year away. So I don’t know what things are going to look like in Western Europe. You’ve got some real development constraints in Europe that are not present in most of the formations in the US that really led the way for shale gas.”  (Editor’s Note: Click for Updates on France and the UK)

“Poland is probably the best positioned of the high potential shale plays in all of Europe right now,” he added. “The geopolitical situation is compelling for them to invest in shale gas and to put some incentives in place. I think they do have some water issues as there’s less water supply, so water prices are going to be high.”

He continued: “If people start with the right regulations and the right rules ahead of time, I think most of the issues can be resolved, but again a lot of it comes back to the supply chain – getting that in place, because if Poland maintains a regionally closed and uncompetitive environment that’s restricted mostly to state associated service companies like Nafta Pila, the state driller, they’re never going to get the costs down. And until they get those costs down, they’re not going to get to meaningful production levels.”

Robart said he believes there is a trickle down effect being felt in Europe from the American documentary Gasland. “I think it absolutely is, particularly in Western Europe. In the US right now I’m a little bit dismayed at the debate – not that I don’t believe there are legitimate concerns that haven’t been and need to be addressed – but because the debate right now is focused on the wrong things.”

“Gasland was a compelling piece of storytelling, but it largely lacks any evidentiary basis on which it’s telling its story. There really has been no evidence about any incident where downhole chemicals are causing water contamination – there’s thousands of feet of separation between the water table and the depth at which the fracturing is actually occurring. “

“The only instances that may have occurred are in poor well construction and integrity, and I’m fully in support of efforts to ensure better well construction and integrity, but [the] real concerns are really in the water flowback. It’s really high in salt content and that’s coming from these formations it’s going into; in addition there’s some radiation concerns, material that naturally occurs in deep formations that’s brought back up in relatively minute levels, but they need to be dealt with and addressed. The concerns need to be solved,” he said.

Robart said he believed there were solutions to these problems and in the last 2-3 years there had been an explosion of innovation in the water management space. “

“A lot of players are jumping into the marketplace, so the supply chain sees the opportunity, sees the market need, so the environmental concerns are driving a major course towards innovation of the water treatment technology and services, but also in the fracturing chemistry, so you’ve also seen most of the major pressure pumpers who make their own chemicals have introduced “green” products. And that’s going to continue to evolve and advance in the next couple of years.”

Still, he said he thought environmental concerns were a risk to the entire shale gas revolution which everyone was looking for internationally. “Because my view, to some extent, is [that] if the US puts in place regulations that are irrational, and that threaten to shut down shale exploration/production in a lot of key geographies across the US, other countries are going to look to that model as a template for regulation. So I think there’s a major risk that if the US doesn’t get it right, it’s going to put the entire revolution at risk.”

This article was originally published on September 6, 2011 by Natural Gas Americas. The original article can be found here.

This article is the third and final in a series of 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 first article in the series discussed the increase in drilling and completion activity in North America, along with a shift to liquids-rich unconventional formations, and the shortages in products and services that have resulted from this rapid shift. The second article discussed how operators and suppliers are responding to those shortages, particularly the unprecedented change in pressure pumper newbuild behaviors and the shift towards long-term commitments for new pressure pumping equipment.

These changes all call attention to a shift in the power structure between operators and pressure pumpers in North America.  No longer do operators hold most of the cards in the relationship, with operators sharing little of the financial risk associated with expensive pressure pumping equipment.  Operators are now being forced to share some of the financial risks and commit to long-term arrangements that are more akin to the ways in which land rigs are contracted.

What implications do these new North American market dynamics hold for international shale and unconventional exploration and development prospects?

Tight markets generally mean that suppliers can charge higher prices for their products and services and this has certainly held true for the North American pressure pumping market.  A recent PacWest analysis forecasts that the cost of pressure pumping services will increase 18% during 2011 and even more in high demand unconventional plays.  These price increases mean high margins for pressure pumping service companies in North America.

Given the high margins available in the North American market, the majority of pressure pumpers are focused exclusively on the North American market.  With a few exceptions, only the Big 4 service companies (Schlumberger, Halliburton, Baker Hughes, and Weatherford) have committed pressure pumping assets to early stage international unconventional markets.  Both Schlumberger and Halliburton have a pressure pumping fleet in Poland; Baker Hughes has been operating a Polish fleet out of its Celle, Germany base and is just about to open a new base in Poland and shift assets there permanently.  Schlumberger also has pressure pumping assets in India and Argentina, recently completing the first large-scale fracs those markets have seen.

As long as North American activity remains robust, something that is expected for at least the next two to three years, international pressure pumping and related products and services will remain expensive.  This raises the costs of already expensive exploration wells to even higher price points.  Also, given the North American shift to long-term pressure pumping commitments and requirement that operators share some of the financial risk with suppliers, international operators will likely face similar demands.

In order to persuade pumpers to commit assets and resources to prospective international markets, operators should begin engaging with an array of pressure pumpers early to understand their capital planning and decision criteria and international expansion plans and requirements.  Many of them will likely require that potential international markets demonstrate superior margins to the North American pressure pumping market in order to justify an international expansion to their management and shareholders.  It is also likely that many of them will require operators agree to risk sharing mechanisms such as sharing the cost of asset mobilization to move people and equipment from North America.  It is also likely that they will require long-term commitments with minimum volume commitments at high dayrates.  Accepting these cost and contract trade-offs may be the only way to convince many pressure pumpers to commit resources outside of the highly profitable North America markets.

Savvy operators should look to team up with other local and regional operators to spread the costs and risks across a larger number of entities.  There has been some discussion among European operators of an arrangement similar to this in Poland and elsewhere in Central Europe, but so far nothing concrete has materialized.

On the other hand, savvy and far-sighted pressure pumpers will understand the value of committing resources to early-stage but potentially large international unconventional markets at lower margins in the short-term in exchange for larger market share over the long-term.

PacWest has worked with both domestic and international suppliers and operators to help them think through and solve many of these very same problems. While based in Houston, we have relationships and local resources in most of the key emerging, international unconventional plays and can help suppliers that are interested in expanding to new international markets establish the right relationships and set up the proper local structure.  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.