Short Sand Supplies Will Slow Growth of US Oil Output
Oil companies would have to pay a premium for the hardware and services needed for rapid expansion. But is that likely?
Shale oil producers in the US and Canada are likely to stick to their slow growth plans this year because they lack the sand, steel, drilling rigs, and pressure-pumping capacity required to grow faster.
Demand outstrips supply in those four key sectors and is expected to remain the case into 2023 because service companies are not able, or willing, to pick up the cost of rapid growth.
“The supply chain issues we are seeing now are one of the main limiting factors in US shale growth” said Ryan Hassler, senior analyst covering US and Canadian shale for Rystad.
The energy data and consulting firm said US onshore producers will add 1 million B/D of production this year, which is about 500,000 B/D short of what would have been possible were it not for the supply shortages.
With increased demand and rising prices, there’s some growth in sectors such as sand supplies, where shortages at the start of the year offered an early warning of a surprisingly tight market ahead after 7 years of mostly down markets.
“It gets us to a position where the market is a little more in balance. It’s definitely still tight and it will stay pretty tight well into 2023,” Hassler said.
What is limiting growth is that adding capacity is costly, and it “is like every oilfield service company has run out of cash,” said Richard Spears, vice president of Spears and Associates.
He called between meetings in New York where he was meeting with investors and lenders who do not seem interested in putting money into oilfield service companies that have been battered almost constantly since the 2014 price crash.
While there are a select group of service companies with cash to invest on expanding their capacity, at this point the sellers are pushing for deals that help them cover the cost of adding capacity.
It is not as if service companies have stopped spending money. Halliburton’s first-quarter earnings report showed its cash on hand dropped by nearly $900 million during a period when its margins on operations improved.
Spears said the spending was likely focused on adding higher-value services such as pressure pumping running on natural gas and electric power, which reduce fuel costs and emissions.
During Halliburton’s recent earnings call, Lance Loeffler, the company’s chief financial officer, said, “We've been very careful about the equipment we've told you is sold out. So, it's not like we're adding incremental equipment.”
Like its customers, Halliburton is focused on funding from earnings.
“I believe that poor service industry returns over many years in North America ultimately resulted in a closed-loop capital system because access to meaningful outside capital doesn't exist today. Market participants must generate their own cash in order to reinvest and grow their businesses,” said Jeff Miller, Halliburton president, chairman, and CEO.
And with four pressure-pumping companies accounting for about two-thirds of the pressure-pumping market, according to Halliburton, the number of small competitors hungry to win market share with low rates is limited.
Oil companies eager to grow could change the outlook. Suppliers and service companies are willing and able to add capacity if an oil company agrees to a contract that can ensure paying for the added capacity—i.e., a contract at a higher rate for a longer term
Spears and Hassler said that is not happening yet.
“I think at this point it is a standoff. Oil companies are not desperate enough to deploy another rig,” Spears said.
The Sand Drought
An early warning of how tight the market is this year was a spate of sand shortages early that began late last year and got worse in January.
It began as a series of sand mine shutdowns scheduled during what is normally a slow time of year. The lost production combined with rising demand spurred by oil prices on their way to $100/bbl revealed how little slack was left in the market.
Supplies from mines near southern shale plays were running so short that Halliburton turned to sand mines in Wisconsin that had been largely shut out of the Texas market because of high shipping costs.
“That was a good example of underinvestment in the supply chain. And as it was turned back on, it had a lot of maintenance, lack of maintenance, and even participated with some of our vendors to help them get things back online,” Miller said.
Some sand miners adding production. Performance Proppants is building a mine on an island in the Red River in Bossier City Louisiana, which will supply the Haynesville play, where development is accelerating to feed LNG suppliers who have seen demand surge since Russia invaded Ukraine.
And in west Texas Devon installed what is billed as a first-of-its-kind mobile sand mine near a pad where it owns the surface mining rights. By cleaning and sorting its own sand at the fracture site, the company said it expects to save $200,000 per well.
There are no cheap fixes on the equipment side, where customers have gotten used to higher-performance drilling and pressure pumping.
Currently, Hassler said estimates range from 550 to 600 of the number of Tier 1 rigs working, with another 100 rigs with 1,500 horsepower, AC electric systems available. But those available rigs generally need work done to enter operation, “So really, the 100 additional rigs are still dependent on price of refurbishment.”
There are some small operators buying old, diesel-powered pressure-pumping equipment, but Halliburton noted that the US market is now dominated by four companies commanding two-thirds of the market.
The bigger players are working to carve out a secure share of the market with digitally controlled devices promising higher efficiency and power systems that reduce emissions and fuel use, which at these oil and gas prices is significant.
Some things, like steel, are beyond the control of oil companies, and hiring the workers needed to expand is another limiter. “We see the service sector hiring as fast as we can but losing at the same pace because of the workers that are retiring,” Spears said.
And the cost of adding those newcomers often includes the increasing time required to do jobs. The equipment may be high spec, but when it is run by green crews, the performance can fall short of expectations, Hassler said.