The pain of low oil prices spreads, killing off U.S. services companies

Falling graph
Source: DollarPhotoClub

The number of fracking companies in the U.S. has fallen from 61 to 41 within the last four months and that number is likely to be further slashed by half, according to Rob Fulks, pressure pumping marketing director at Weatherford, speaking in an interview at the IHS CERAWeek conference in Houston.

The low oil prices – which have fallen by 60 per cent since last June and then slowly rebounded a little in the last couple of weeks – have caused pain for the oilfield companies providing services to the fracking industry. Now that the balance of power has moved toward the E&P companies – themselves often pushed into the red – they are putting the squeeze on the fracking companies to cut prices.

Not everybody can afford to do so, though. While some companies have found bigger buyers to take over their operations – such as the recent takeover of Baker Hughes by the giant Halliburton, and C&J Energy Services Ltd. buying the pressure-pumping business of Nabors Industries Ltd, others have had to park their equipment and cease operations.

The situation is further exacerbated by the decision taken by many companies not to produce from drilled wells but rather keep the oil in the ground awaiting a more favourable pricing environment. The IHS Energy Analysis of Drilled, but Uncompleted Wells (DUC) in the Eagle Ford Shale indicates DUCs can be converted to producing assets for approximately 65 per cent of the cost of a new drill, significantly lowering the economics when evaluated against remaining costs.

This ‘fracklog’, as it is called, is quite substantial. Speaking to Bloomberg, Raoul LeBlanc, an oil analyst with Englewood, Colorado-based consultant IHS Inc., pegged the U.S. fracklog at around 3,000 wells. Halliburton Co., the world’s second-biggest provider of oilfield services, estimated there are about 4,000 uncompleted wells, citing “third party estimates.”

According to Bloomberg Intelligence analysis, there are 322,000 barrels a day stored underground in oil and gas fields from Texas to Pennsylvania. That’s almost as much as OPEC member Libya has been pumping this year.

Speaking at the Shale World UK conference in Birmingham last week, Chris Faulkner of Breitling Energy said the drillers have had to “create what we call a ‘fracklog’, were about 3,000 wells in the United States have been drilled, and at the drilling point we just stop, we don’t frack the wells, we aren’t producing them. We move to the next location and attempt to hold the acreage. We had a window of time we could drill and stop and then the well could produce. In North Dakota it’s about a year. We’re going to have a year lag and still not lose our acreage and keep the oil in the ground – it’s sort of like virtual storage if you will. So, when oil prices rebound, there’s going to be a tremendous amount of fracking taking place in a very short amount of time, and a lot of oil moving into the market.”

The problem is that many fracking companies may not be able to wait that long. Oil companies are cutting more than $100 billion in spending globally after prices fell. Frack pricing is expected to fall as much as 35 percent this year, according to PacWest, a unit of IHS Inc.

And while E&P companies are putting pressure on the oilfield service firms, they – in turn – lean on the frac sand, and proppant providers. As Bloomberg reports, Weatherford – the fifth-largest fracking company in the U.S. – is just one of the many companies that have been able to negotiate price cuts from the sand suppliers.

And so the pain gets passed on.

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