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Overall North American hydraulic frac services pricing is stabilizing as small/start-up pumpers continue to add capacity into an oversupplied market, according to the 13Q1 release of PacWest Consulting Partners’ PumpingIQ report.  PumpingIQ monitors and forecasts the global hydraulic fracturing market and unconventional oil and gas activity on a regional basis.  PacWest estimates that US hydraulic fracturing capacity utilization in the first quarter of 2013 averaged 76%, up from 72% in the fourth quarter of 2012.  PacWest is also forecasting that small pressure pumping companies will add an additional 600,000 HHP (hydraulic horsepower) of net frac capacity in US market in 2013, bringing total US capacity to 16.3 million HHP.

PacWest’s WellIQ report, which monitors and forecasts rigs and well completions by region, expects well completions to rise throughout 2013, but not enough to structurally change the supply/demand balance in the frac market.  PacWest forecasts that capacity utilization will increase to 79% by the fourth quarter of 2013, still only enough to decrease excess capacity to 3.4 million horsepower, 21% of available capacity in the market.

“While overall rig counts fell, US Land well completions count grew 6% in the first quarter of 2013 from the previous quarter, increasing frac capacity utilization to 76%,” says Christopher Robart, a Principal with PacWest and the lead author of PumpingIQ and WellIQ.  “While some regions were stronger than others, we estimate that aggregate frac pricing in the US fell by 2% in the first quarter of 2013.  We expect aggregate pricing to fall by 6% over 2013 across all US plays.”

Conditions in the US frac market are expected to improve through 2014 but only enough to increase average 2014 capacity utilization to 81%.

PacWest forecasts that global hydraulic fracturing capacity will total 24.3 million HHP by year-end 2013, a total of 2.2 million HHP net frac capacity increase over year-end 2012.  This capacity growth is split evenly between North America, China, and Rest-of-World.  While markets outside North America are expected to experience significant growth, economically viable production from shale is yet to be commercially proven.  However, pressure pumping companies are positioning to capture the potential growth outside North America, leading to forecast international capacity additions of 25% per year.

As a part of the 13Q1 release of PumpingIQ, PacWest published the first detailed study of the hydraulic fracturing market in Argentina. “We forecast that frac capacity in Argentina will grow moderately from 260,000 HHP at year-end 2013 to 775,000 million horsepower by year-end 2017,” according to Alexander Robart, a Principal at PacWest.  “While the geology is extremely compelling, the politics make the capital investments required to prove and economically scale shale production a risky endeavor for foreign players.”

PacWest will host a conference call on Wednesday, May 22^nd at 10:00 AM Central Time to brief its customers and all other interested parties on its view of the market.  Call details are provided below.

Conference Call

Dial-in: 1+ (800) 830-3581

Passcode: 2922791

WebEx Presentation

https://meetingvisuals.webex.com/meetingvisuals/j.php?ED=236737672&UID=499204927&RT=MiM3

Dual-fuel technology is one of the biggest new trends in drilling and hydraulic fracturing operations, as well as in-field power solutions, and 2013 appears to be a critical year for an acceleration in its deployment. Fuel savings of roughly 20% are possible with CNG/LNG delivered to the site, and larger cost savings are possible using line gas or wellhead gas, when available and compatible with equipment. Some areas should see rapid payback periods of less than 1 year. The increased use of natural gas alleviates air quality concerns associated with diesel engines and natural gas flaring, and the CNG/LNG supply needed for the oilfield can help facilitate natural gas use in transportation, which accounts for the majority of US oil consumption.  At least 100 pumping trucks have already been converted to dual-fuel in NAM Land, with an additional 50 or more expected in the next 6 months, while more than 100 drilling rigs have also been converted.

Dual-fuel technology involves the ability to run engines on a combination of diesel and natural gas. Dual-fuel can be used on engines for frac pumps, drilling rigs, and on-site generators. Most engines that use dual-fuel technology in the next few years will be converted using kits made by companies such as Caterpillar, GTI-Altronic, APG, and ComAp. Newbuild dual-fuel units are likely to be low given limited newbuild capacity additions over the next 12-18 months. Caterpillar’s dynamic gas blending conversion kit runs on fuel with a range of energy content that includes blends with ethane and propane, making it more flexible for field gas applications. Some companies are pursuing other technologies that run on closer to 100% natural gas, such as GreenField’s turbines, or drilling rigs from Ensign Energy Services powered by natural gas generators.

Many service companies, E&Ps, OEMs, and fuel suppliers are investigating or actively pursuing the dual-fuel opportunity. The “Big 3” pumpers (Schlumberger, Halliburton, and Baker Hughes) are conducting trials with dual-fuel technology, and various midsize pumpers either have small dual-fuel fleets or have expressed interest in dual-fuel conversion. Meanwhile, Ensign Energy Services and CanElson Drilling have converted about 15 drilling rigs each. Notable E&Ps partnering with these service companies include Encana, Apache, Cheseapake, Consol Energy, EQT, Noble, and Shell. The Marcellus and the Western Canadian Sedimentary Basin have seen the most activity to date, but trials are beginning in plays across North America. Dual-fuel requires technologies new to the oilfield including on-site fuel storage and CNG/LNG transportation, which companies such as GE, OsComp, and Galileo are supplying. Linde and Prometheus, among others, have supplied LNG for oilfield applications.

While we at PacWest are bullish about dual-fuel trends, recent reports have surfaced that tend to be overly optimistic about its potential, often based on simplified economic analyses and a failure to appreciate the many deployment challenges. Substitution rates of natural gas in place of diesel are likely to be closer to 50%, rather than the 65-70% often quoted in the press, at which point the economics start to become less compelling. The best places for dual-fuel are plays with high production of high-quality natural gas and high levels of multi-wellpad operations.

However, in all plays, logistical challenges remain: there are few LNG supply facilities in the US today, CNG fuel requires a large number of truck trips to transport the fuel given its lower energy density, pipelines are often not located close enough to drilling activity, and wellhead gas needs to be produced consistently and cleaned up to sufficient spec. We are optimistic about the potential for dual-fuel to help pumpers reduce their cost structure, but it will require a significant collaboration between E&Ps and service companies to jointly tackle these challenges. Full conversion to dual-fuel will cost over $1 billion, according to our initial estimates, but it is currently unclear who will invest the capital and over what timeframe the investment will occur.

PacWest Consulting Partners has launched the first release of the WellIQ market intelligence product, which offers detailed well completion statistics and forecasts on a regional level. WellIQ will feature the following analysis for all key US and Canadian plays:

• Play-by-play rig counts and activity forecast (3-year)
• On-going analysis and forecasts (3-year) of vertical and horizontal drilling and completion activity
• On-going analysis and forecasts of frac stage counts
• On-going analysis and forecasts of drilling efficiencies
• On-going analysis of multi-wellpad penetration

Please contact us for more information about WellIQ.

American Water Intelligence quoted PacWest Principal Alexander Robart in its article “Picking Tomorrow’s Winners in Fluid Frac’ Water Market,” available in its March 2013 issue.

According to Robart, “Most people who are new to this space and think they have the latest and greatest new technology that’s going to change oilfield water don’t see that oilfield water is a services business. It is not a technology play.”

Robart went on to say that successful oilfield service firms are likely to primarily license proprietary technology from smaller companies. The most promising companies are those with technologies general enough for any play or those focused enough to satisfy niche markets.

PacWest Consulting Partners has just published the 12Q4 release of its PumpingIQ report, which monitors the global hydraulic fracturing market. PacWest analysis concludes that the gap between aggregate US hydraulic fracturing supply and demand peaked in the fourth quarter of 2012. PacWest estimates that US hydraulic fracturing capacity utilization in the fourth quarter of 2012 averaged 75%, resulting in an average capacity utilization of 83% for the year.

“The US land rig count fell further than expected in the last quarter of 2012, leading to a record 4 million horsepower of frac capacity sitting on the sidelines for lack of work,” says Christopher Robart, the lead author of PumpingIQ. “We estimate that aggregate frac pricing in the US fell by 15% in 2012 and, although the free-fall in frac pricing that we have seen since early 2012 has finally slowed down, prices are still soft in most plays across the US. However, we finally see light at the end of the tunnel and expect pricing to stabilize in most plays by the second half of 2013. We expect aggregate pricing to fall by an additional 4% in 2013.”

Rig count and well completions are expected to rise throughout 2013, but not enough to structurally change the supply/demand balance in the frac market. PacWest forecasts that capacity utilization will increase to 80% by the fourth quarter of 2013, still only enough to decrease excess capacity to 3.2 million horsepower, 20% of available capacity in the market. Conditions in the frac market are expected to improve through 2014 but only enough to increase average 2014 capacity utilization to 82%.

PacWest estimates that global hydraulic fracturing capacity totaled 21.9 million HHP at year-end 2012. PacWest forecasts that global hydraulic fracturing capacity will grow to 37.4 million HHP by the end of 2017, a 5-year increase of 71% between 2012 and 2017. Markets outside North America are expected to experience significant growth, increasing from 20% of global capacity to 42% of global capacity.

As a part of the 12Q4 release of PumpingIQ, PacWest published the first detailed study of the hydraulic fracturing market in the Middle East / North Africa (MENA) region. We forecast that frac capacity in the MENA region will grow rapidly from almost 0.4 million horsepower at year-end 2012 to nearly 1.8 million horsepower by year-end 2017, with much of the capacity targeting tight gas. Saudi Arabia and Oman are expected to account for the vast majority of the growth in the market, accounting for nearly 80% of regional capacity in 2017.

As rig and well completions counts have diverged in recent years, better estimates of well completions have become the critical metric for properly measuring and forecasting oilfield activity. The PacWest team has been regularly forecasting well completions for internal use. After numerous requests from clients and subscribers, the firm has agreed to launch a stand-alone product focused on well completions, called WellIQ. The report is a quarterly-released subscription product that forecasts well completions on a play-by-play basis for both the US and Canada. The latest analysis indicates that 23,448 horizontal/directional wells will be completed in the US in 2013, an increase of 3% over 2012, with an additional 7% increase in horizontal/directional well completions expected in 2014.

PacWest will host a conference call on Monday, March 4th at 10:00 AM Central Time to brief its customers and all other interested parties on its view of the market. Call details are provided below.

Conference Call Details

Conference Call
Dial-in: +1 800 830 3581
Passcode: 2922791

WebEx Presentation
https://meetingvisuals.webex.com/meetingvisuals/j.php?ED=224214512&UID=499204927&RT=MiM3