Part III: North American Pressure Pumping Trends, International Implications
Recent Trends in the North American Pressure Pumping Market Have Serious Implications for Domestic and International Operators and Suppliers
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.