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COVID-19 forces pumping suppliers to accelerate drastically the measures they started taking last year
24 April 2020IHS Markit Energy Expert
We released
the latest PumpingIQ report in the wake of OPEC discussions and
the effects of COVID-19 on the global economy, which have combined
to leave the oil market in an historic state of turmoil.
Even before this upheaval, service companies were preparing for
a "down" 2020 and Schlumberger and Halliburton made headlines when
they announced a 50% and 25% reduction (idling) in hydraulic
horsepower (HHP) respectively to address substantial amounts of
generalized oversupply in the US market.
While these cuts seemed drastic at the time, no one could
possibly have foreseen that the situation would change to the point
where we are now projecting a drop of about 84% in US total fracs
from Q1 2020 to Q4 2020!
Of course, other companies took their own measures and the
industry quickly saw the impact, with total North American HHP
capacity dropping from about 24.6MM HHP
at the end of 2019 to our current assessment of 23.4MM HHP
(Figure 1), a fall of about 5%. These figures are
for total capacity, we are expecting a dramatic increase for 2Q20
in warm stacking and cold stacking of equipment, with 2Q20 to 4Q20
seeing dramatic cuts in overall capacity (scrapping).
Figure 1: Current North American total frac capacity in
HHP
We expect significantly more capacity cuts by the end of 2020,
and these will have to be severe to have any hope of meeting
projected demand on the way down, which we believe could hit zero
new wells in certain parts of the country at discrete times.
Because of these unique and extreme conditions, 2020-21 could
become two years during which pumping companies attempt to shed
massive amounts of idle equipment, restructure debt, and transform
themselves into more differentiated companies that embrace
digitization, electrification, and environmental responsibility as
the basis for their operations. We began to do research on some of
these topics in 2019, and Onshore Services & Materials clients
can access our extensive work around electric fracturing, namely
our e-frac cost comparison tool and
E-Frac special report via the Connect platform.
The question on everyone's mind now is: which pumping suppliers
will survive this downturn? With demand projected downwards so
dramatically, pricing will be a key lever and on one hand operators
are absolutely asking for concessions, but on the other hand
service companies likely feel they have already provided ample
price cuts since the last downturn of 2014-2015.
Ultimately it will be up to the operators who have a range of
options available to them, from squeezing every last cent out of
their pumping suppliers, to (theoretically anyways) being able to
integrate vertically by buying their own pumping company, perhaps
at a significant discount than they would otherwise be able to.
While that option may seem fanciful, any moves taken by
operators should consider the supplier and competitive landscapes
as much as possible, and to that end we will be launching shortly
our new Frac Insights tool. This will be temporarily free
of charge to our clients and will allow them to view in very
granular detail the pumper-operator relationships over time in the
US (Figure 2).
Figure 2:Screenshot from IHS Markit's Frac Insights
tool
We can talk at length about the market factors resulting from
COVID-19 but we should always remember that this disease puts
people at great personal risk. In a service line that requires
large crews to work closely together for long stretches of time,
there are numerous potential implications to consider:
What happens to efficiency once social distancing takes effect
at service locations?
Will crews be as effective and motivated?
What happens in the event of a frac crew fatality caused by
COVID-19?
What preparations do suppliers have in place to deal with the
emotional and psychological consequences of such an event?
The answers to these questions are difficult to quantify and
will likely only become clear well after COVID-19 has run its
course. Nevertheless, we will do what we can to report on the
disease's effects on pumping suppliers in future publications of
PumpingIQ.
We provide full details on the hydraulic fracturing services
market in our PumpingIQ report which is open to clients of IHS
Markit's Onshore Services & Materials subscription. Learn more about our PumpingIQ
service.
Jesus Ozuna is a Principal Research Analyst at IHS
Markit.