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US onshore shale players have ramped up 2018-19 capital spending
intentions and production targets across the board, from the
smallest independents to the Global International Oil Companies.
This raises the prospect of 2018 being the year when the "fallacy
of composition" takes hold in the unconventional asset space.
A "fallacy of composition" situation would mean services and
infrastructure are more than adequate to support each individual
company's development plans, though prove incapable of supporting
the cumulative activity levels being planned for the unconventional
resource plays. A consequence being higher-than-anticipated upward
pressures on capital and operating costs, challenging the ability
of operators to retain the cost improvements accrued over the past
36 months.
As part of the continued push to face these challenges and conserve
cost reductions, more and more North American operators are
directly sourcing their own water, proppant, and chemicals.
Consequently, pressure pumping companies have begun to look less
like oilfield service providers, and more like traditional
utilities in that they are reduced to offering what is essentially
commoditized power.
If one accepts this suggestion, then one might also be prepared to
accept that there could be a more illustrative way of assessing
North America's frac fleets than simply looking at hydraulic
horsepower (HHP).
One of the first math lessons we learn in school is that of "apples
and oranges", to illustrate the importance of units for performing
correct analyses. As we become more experienced, units take on a
more nuanced significance: they become a way not only to check for
correctness within an operation, but also a tool to look at an
analysis in a different, more insightful way.
For instance, we purchase a vehicle to transport us over a
distance, so "miles" is an important unit to consider. Indeed, that
quantity is utilized heavily for lease calculations as well as
purchase decisions.
But would anyone argue that how far the car is driven in between
fill-ups is perhaps of secondary importance to how it was driven:
would one rather buy a car with 100,000 miles that was gently
driven at legal speeds on the highway, or 50,000 miles by a
16-year-old with a heavy foot who loves the smell of burnt
rubber?
Put another way, we should look at the units of "miles" by
themselves as well as miles:
Per hour, to represent "wear and tear"
Per year (or month, day, etc) to estimate remaining useful
life
Tying this back to the North American upstream
industry, I use this preamble to propose the following
hypothesis:
By focusing solely on HHP to calculate utilization and more
generally assess North America's frac fleets, service companies and
operators may be missing a significant piece of the whole
story.
Indeed, there is some attention on fleet turnover (i.e. per
year) as described by the second bullet point, but in our view not
as much on the first (i.e. per hour). Speaking of available HHP
within a region does have some meaning, but HHP represents the
capacity to produce power, not how that power is delivered.
This is a subtle but key distinction, and it's the reason that
our electricity bills are calculated based on kW/hr rather than kW:
a power plant has the capacity to deliver a certain power load, but
from the utility's point of view, 500 kW/hr looks very different if
it's 5 kW for 100 hours than 500kW for one hour.
This relevance of rate is crucial for power providers to keep in
mind because each outcome represents a very different service
capacity and maintenance schedule.
If those two terms (capacity, schedule) sound as if they apply
to fracing, well, they do -- and increasingly so as operators
source more water, proppant and chemicals themselves.
In accepting this paradigm - rate of capacity delivery
is just as important as the capacity itself - a slew of analogies
lends itself to analyzing and truly understanding the frac market:
the aforementioned utilities, transportation industries and
manufacturing.
The common threads amongst these industries are the constraints
imposed by the all-important dimension of time; it is this
dimension that we at IHS Markit have begun working into our
analyses of the onshore frac market.
We remain at the earliest stages of implementing this change in
our approach to research and forecasting. Rather than make this a
purely academic study, the intention is to take advantage of the
team's deep experience and make the analysis as operationally
accurate as possible. With that in mind we have begun to factor in
the following:
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