A number of factors have impacted the US hydraulic fracturing market in 2012, including redeployment of frac crews to less service intensive oil/liquids plays, reduction of time per frac by adopting sliding sleeves in completions, improved efficiency of frac crews, and fewer frac stages per well in gas plays by some operators.
However, the biggest factor impacting the frac market is the drop in the rig count, Christopher Robart, principal, PacWest Consulting Partners, explained in a webinar Dec. 12 on its 3Q 2012 frac market update. Demand for frac services is expected to fall 14% between 4Q 2011 and 4Q 2012.
“After a steep fall in the rig count during the second half of 2012, we expect rig counts to recover over the first three quarters of 2013. The rigs will come back online at a slower pace than the count fell off,” he said. There was an 11% drop in the rig count between 2011 and 2012. The rig count is expected to increase by 7% through 2013.
That will translate into an estimated 15% increase in frac demand between 4Q 2012 and 4Q 2013. However, new additions to the frac fleet will increase frac capacity by 18% in 2012 in the face of a 14% decline in demand and a 31% drop in capacity utilization, he continued.
Frac capacity utilization will end 2012 at 74%, according to PacWest’s estimate. There will be a supply/demand imbalance of about 4.2 million hydraulic horsepower (MMhhp) at the end of the year.
“We expect frac capacity will continue to increase incrementally in 2013 (+3%), ending the year at 15.8 MMhhp. We forecast that capacity utilization will increase through 2013 to 82% after bottoming out in early 2013,” Robart noted.
At the end of 3Q 2012, there was an estimated 3 MMhhp of idle, stacked, or undeployed capacity. “Due to a steep fall in drilling and completion activity in the latter half of 2012, we expect nearly 3.4 MMhhp to be idle, stacked or undeployed by the end of this year,” he said.
The depressed capacity utilization is driving sustained decreases in new bids and spot pricing. The long-term contracts have gone away, and there are only a few medium-term agreements, he noted. “For the most part, take-or-pay clauses in contracts are a thing of the past. Typical contracts are now six to 12 months. Operators now have flexibility in finding frac services and see no problem going forward.”
With 3Q 2011 as the base index (100), PacWest’s pricing index for 4Q 2012 is 94, which is expected to fall to 78 by 4Q 2013. “Prices in key plays have fallen nearly as far as these can, reaching near-break-even and even negative margins in some cases. Prices in the key liquids plays will continue to fall for the next nine months, stabilizing in the second half of 2013,” he emphasized.
The change in the market has impacted shares for the fracing companies. The “Big 4” pumpers (Halliburton, Schlumberger, Baker Hughes, and FTS) operated 49% of total US frac capacity in 3Q 2012, down from 60% in 3Q 2011. The total capacity for the Big 4 will continue to decline to 45% by the end of 2013.
The market share for medium-sized pumpers increases moderately from 33% in 3Q 2011 to 38% in 3Q 2012. Small pumpers will increase that share of capacity from 7% in 3Q 2011 to 16% in 4Q 2013, he continued.
International frac capacity is expected to grow 243% through 2017 from 4.4 MMhhp in 2012 to 15.1 MMhhp in 2017. Outside the US, China is expected to overtake Canada as the second largest frac market in the world (as measured by capacity) by the end of 2014. Canada currently has only 11 players with available capacity. The country has increased capacity dramatically, rising from 1.6 MMhhp in 4Q 2011 to an estimated 2.2 MMhhp at year-end 2012 (42% annual growth). Another 200,000 hhp is expected to be added by year-end 2013.
The Canadian “Big 3” (Trican, Calfrac, and Sanjel) have a little over 1 MMhhp capacity. The US Big 3 in Canada (Schlumberger, Halliburton, and Baker Hughes) come in with about 770,000 hhp. The startups and new entrants (Canyon, GasFrac, Nabors, Element, Iron Horse, Millennium, and Evolution) total about 403,000 hhp.
There has been a slow-down in the Canadian market since the rig count did not return to historic levels after spring break-up in 2012. The likely culprits for the downturn are a decline in gas-focused drilling and uncertainty about future commodity prices.
China is now the largest frac market outside North America with Russia the second largest market. China nearly tripled its capacity to 1.4 MMhhp by the end of 2012, with the majority driven by tight oil/gas activity. The country is a tough market for foreign companies wanting to provide frac services. Currently, foreign companies are overseeing domestic pumping service companies.
New government incentives in Russia that encourage tight oil development are expected to drive capacity additions in the near-term. Additional growth is expected as tight oil moves out of the exploration phase, he added. Capacity is expected to be 700,000 hhp by the end of 2012.
“We expect global frac capacity to grow from 17.7 MMhhp in 2011 to 36.9 MMhhp in 2017. Although North America accounted for 83% of global frac capacity in 2011, we forecast that its share will decrease to 59% by 2017, as international markets grow,” Robart said.
Strong growth in frac demand is also expected in Australia, Argentina, Mexico, North Africa, and the Middle East.
There will be a shift of frac equipment out of North America into other countries, particularly Australia, he noted. The Big 4 is watching Australia. In countries like Argentina, local content requirements will likely impact how much equipment can be imported into those countries.
Contact the author, Scott Weeden, at firstname.lastname@example.org.
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