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PacWest Upstream Oil/Gas Supply Chain Update - Eagle Ford
 

PacWest Upstream Oil/Gas Supply Chain Update - Eagle Ford

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    PacWest Upstream Oil/Gas Supply Chain Update - Eagle Ford PacWest Upstream Oil/Gas Supply Chain Update - Eagle Ford Presentation Transcript

    • Upstream Supply Chain UpdateDUG Eagle Ford 2012San Antonio, TXOctober 15, 2012 Christopher Robart, Principal crobart@pacwestcp.com +1 202 352 7805 PacWest Consulting Partners | 920 Memorial City Dr | Suite 160 | Houston, TX 77024
    • EAGLE FORD SUPPLY CHAIN UPDATE Terms & Conditions of Use All materials included in this presentation were prepared by PacWest Consulting Partners, LLC. The original presentation is not to be redistributed to third parties in any manner without prior written consent. The presentation may be redistributed within the Client’s organization without prior written consent, as long as due care is taken to hold the presentation confidential within Client’s organization. PacWest presentation contents and information, including but not limited to all graphs, charts, tables, figures, and data may be reproduced, reused, or republished, as long as PacWest is clearly cited as the source. PacWest is not liable for the information provided. Some information supplied by PacWest may be obtained from sources that PacWest believes to be accurate and reliable. However, the information is in no way warranted by PacWest as to accuracy or completeness. The information contained in this document is believed to be accurate, but no representation or warranty, express or implied, is made by PacWest as to the completeness, accuracy or fairness of any information contained in it. PacWest does not accept any responsibility in relation to such information, whether it be fact, opinion, or conclusion that the reader may draw. PacWest has no obligation to update any content or information provided to a client in any of its reports or materials. © 2012, All rights reserved, PACWEST CONSULTING PARTNERS, LLC. If you have any questions regarding these terms of use or the content in the following presentation, please contact: PacWest Consulting Partners, LLC 920 Memorial City Way, Suite 160 Houston, TX 77024 +1 888 983 1110 www.pacwestcp.com Client Confidential © PacWest 2012 | All rights reserved | 2
    • EAGLE FORD SUPPLY CHAIN UPDATE Contents 1. About PacWest 2. Eagle Ford Supply Chain Constraints - Hydraulic Fracturing Services - Proppant - Guar Gum - Water 3. Summary Client Confidential © PacWest 2012 | All rights reserved | 3
    • EAGLE FORD SUPPLY CHAIN UPDATE PacWest is a boutique strategy consultancy and market intel firm specializing in energy, industrial, resources; strength in the oilfield PacWest Overview & Capabilities Consulting & Advisory Market Intelligence Products  Provide strategy consulting and  Offer industry-leading, granular advisory services to energy, industrial, analysis of the oilfield and resources clients  Deep knowledge and strength in the  Strength in the oilfield supply market pressure pumping / frac market - Often work with E&Ps or suppliers across range of industries that  Employ combination of primary supply products/services to it intelligence + secondary research  Generally work at C-Level or business  Unique in market: apply strategy lead level consulting capabilities to turn research into actionable intelligence All key staff come from top-tier strategy firms; consulting and market intelligence capabilities reinforce/inform each other Client Confidential © PacWest 2012 | All rights reserved | 4
    • EAGLE FORD SUPPLY CHAIN UPDATE Forecasts are achieved through a comprehensive methodology focused on primary intelligence, plus rigorous research, and Methodology PacWest employs a multi-pronged approach to deliver market intelligence: Primary Intelligence Secondary Intelligence FracDB Insights are based on: Regularly consulted sources  The PacWest FracDB is a  On-going conversations include: proprietary database that with PacWest source contains detailed data for  Market research reports network of on-the-ground over 26,000 wells frac’ed in  Company annual reports, the US in 2011/12 field experts 10-Ks, 10-Qs  In-depth surveys,  The database contains  Speeches and detailed data for each frac interviews and presentations by company including: conversations with leadership and other - Operator operators and suppliers industry experts - Pressure Pumper  Industry-leading experts  Analyst reports from - Well/API number and technical specialists leading banks - Frac type, chemicals,  Other PacWest internal  Government data TVD, water volume, etc. databases/models Client Confidential © PacWest 2012 | All rights reserved | 5
    • EAGLE FORD SUPPLY CHAIN UPDATE Contents 1. About PacWest 2. Eagle Ford Supply Chain Constraints - Hydraulic Fracturing Services - Proppant - Guar Gum - Water 3. Summary Client Confidential © PacWest 2012 | All rights reserved | 6
    • EAGLE FORD SUPPLY CHAIN UPDATE The Eagle Ford rig count grew by 118% between Dec 2010 and May 2011, placing incredible strain on the oil/gas supply chain Where Have We Been? Growth in Eagle Ford Rig Count Eagle Ford Rig Count (Oct-2010 – Oct-2012) Comments 300 ■ The Eagle Ford rig count increased from 119 in Dec-2010 to 259 in May-2012, 250 an increase of 118% in less than 18 months 200 ■ The increase in rig count strained all 150 parts of the oil/gas supply chain and Rigs infrastructure 100 ■ Shortages in the following areas have been particularly high profile: 50 - Frac equipment 0 - Proppant Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 - Guar gum - Water Client Confidential Source: Baker Hughes © PacWest 2012 | All rights reserved | 7
    • EAGLE FORD SUPPLY CHAIN UPDATE However, the supply chain in the Eagle Ford has finally caught up with the rig count; constraints are now minimal Where are We Now? Current State of the Supply Chain in the Eagle Ford ■ Minimal supply chain constraints exist in the Eagle Ford today - The supply chain has caught up with the rig count, minimizing the vast majority of constraints ■ Frac Services: market for frac services entered an oversupply situation starting in early 2012, oversupply is expected for the foreseeable future - Prices for frac services continue to fall as supply enters the market and demand dips ■ Proppant: all types of proppant available in abundance - Even course sand grades (20/40 and 30/5) that were previously in shortage are now available in abundance; PacWest estimates that frac sand capacity has increased by 59% since 2010 ■ Guar Gum: although prices have been on a roller coaster, no shortages have been reported in 2012 - Guar gum prices reached $25/kg in May 2012 but have since fallen to $3/kg - Significantly larger crop of guar seed expected in the 2012 harvest (happening now!), reducing risk of future shortage ■ Water: still a challenge but both groundwater and surface water widely available since the drought ended in September 2012 - Sourcing water still poses a risk to drilling & completion schedules but we have received few reports of delays due to problem sourcing water Client Confidential © PacWest 2012 | All rights reserved | 8
    • EAGLE FORD SUPPLY CHAIN UPDATE Contents 1. About PacWest 2. Eagle Ford Supply Chain Constraints - Hydraulic Fracturing Services - Proppant - Guar Gum - Water 3. Summary Client Confidential © PacWest 2012 | All rights reserved | 9
    • EAGLE FORD SUPPLY CHAIN UPDATE A falling US land rig count (-7%) is driving a reduction in demand for hydraulic fracturing services (-8%) in 2012 US Land: Rig Count vs. Frac Demand Rig Count vs. Frac Demand (11Q4-13Q4) Comments 2,000 US Land Rig Count ■ With the exception of an increase in US Land Frac Demand 13Q1, US land rig counts are expected to 1,947 1,950 drop through EOY 2013, causing a fall in 1,923 13.5 frac demand 1,898 ■ Frac service intensity is also falling, Frac Demand (MM HHP) 1,900 13.0 causing incremental reductions in Rig Count 1,850 1,855 1,850 13.0 1,850 12.9 demand, due to: 1,820 1,825 12.5 - Redeployment of frac capacity to 1,795 1,800 lower-service intensity oil/liquids plays 12.4 12.2 12.2 12.0 - Greater adoption of sliding sleeves 12.1 12.1 1,750 12.0 12.0 completions, reducing time per frac - Improved efficiency of frac crews, Forecast 1,700 11.5 11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4 reducing time per frac Rigs / MM HHP Percent Change (%) - Minor changes in frac design, causing Metric 11Q4 12Q4E 13Q4E 2012∆ 2013∆ incremental reductions in HHP per frac Rig Count 1,947 1,820 1,795 -7% -1% - Reduction in frac stages per well in gas Demand 13 12 12 -8% +1% plays by some operators Client Confidential Sources: PacWest analysis; Baker Hughes © PacWest 2012 | All rights reserved | 10
    • EAGLE FORD SUPPLY CHAIN UPDATE However frac capacity is increasing (+19%) through 2012, leading to a dramatic fall in capacity utilization (-26%) US Land: Frac Services Supply vs. Demand vs. Capacity Utilization Frac Supply, Demand, Utilization (11Q4-13Q4) Comments 18 Frac Demand 110% ■ We forecast a net frac capacity increase 17 Frac Capacity 105% of 19% in 2012, compared to a frac 104% Capacity Utilization demand decrease of 8%, resulting in a Frac Horsepower (MM HHP) 16 100% supply/demand imbalance of 2.6 Frac Capacity Utilization 16.0 16.1 15.8 16.0 15 95% 15.2 15.6 95% million HHP 14.7 14 14.2 90% ■ We forecast that capacity utilization, 13.0 12.9 13 12.4 85% 85% nearly 104% in 11Q4, will crash through 13.0 12.2 12.2 12.1 12.1 12.0 81% 12.0 2012, ending the year at 78% 12 80% 11 78% 78% 76% 75% ■ Frac capacity will continue to increase 76% 75% Forecast incrementally in 2013 (+3%), expanding 10 70% 11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4 the supply/demand imbalance to 4 million HHP MM HHP / Utilization (%) Percent Change (%) Metric 11Q4 12Q4E 13Q4E 2012∆ 2013∆ ■ We forecast that capacity utilization will Demand 13 12 12 -8% +1% fall incrementally through 2013, closing Supply 13 16 16 +19% +3% out the year at 75% Utilization 104% 78% 75% -26% -2% Client Confidential Sources: PacWest analysis © PacWest 2012 | All rights reserved | 11
    • EAGLE FORD SUPPLY CHAIN UPDATE All key US plays are now in a negative frac pricing environment, with an aggregate price change of -14% forecasted for 2012 US Land: Frac Capacity Utilization vs. Price Index (New Bid / Spot Market) Aggregate Capacity and Price Index (11Q4-13Q4) Comments 110% Capacity Utilization 110 ■ Available frac capacity surpassed 105% 104% Price Index 105 demand in 12Q1, and we forecast a 100 rapid drop in capacity utilization of 26% Pricing Index (New Bid / Spot Market) 100% 102 100 from 11Q4 to 12Q4 95 ■ We forecast that aggregate US frac Frac Capacity Utilization 95% 95 95% 91 pricing will decrease by 14% in 2012 90% 88 90 86 and decrease by an additional 8% in 85% 84 82 85 2013 85% 81 80% 81% 80 ■ Frac pricing in gas plays is expected to 78% 78% stabilize in late 2012 and early 2013 75% Price Index: 76% 76% 75 75% 11Q3 = 100 Forecast ■ Frac pricing in liquids plays is expected 70% 70 11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4 to continue to fall in 2012 and early Utilization (%) / Change in Price Percent Change (%) 2013, with prices stabilizing in late Metric 11Q4 12Q4E 13Q4E 2012∆ 2013∆ 2013 Utilization 104% 78% 75% -26% -2% Price Trend +2% -4% -2% -14% -8% Client Confidential Sources: PacWest analysis © PacWest 2012 | All rights reserved | 12
    • EAGLE FORD SUPPLY CHAIN UPDATE The Eagle Ford is expected to be in a negative frac pricing environment throughout 2012 Eagle Ford: Frac Supply vs. Demand vs. Capacity Utilization vs. Price Index Supply & Demand (MM HHP) Market Trends 3.4 ■ Despite the consistent recent historical 3.1 3.1 3.1 3.2 3.0 3.0 3.1 increases, rig count is expected to fall 2.9 3.0 slightly for the remainder of 2012, with 2.7 2.8 2.8 a similar impact on demand 2.6 2.8 2.8 2.8 2.8 2.7 2.7 2.4 ■ An influx of frac capacity has decreased 2.2 2.2 2.4 utilization from 109% in 11Q4 to 98% in 2.0 2.2 Forecast 12Q2, which has been reflected in 11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4 pricing Utilization & Price Index (New Bid / Spot) 110% 109% 120 ■ Sources report price concessions for Price Trend: 110 new bids in the range of 10% to 20% in 105% 11Q3 = 100 Price index (11Q3 = 100) 96 106 12Q1 reflected in our model Capacity Utilization 100 89 100% 82 90 97% 77 75 73 72 71 80 ■ Sources report prices of between 98% 95% 94% 70 $120K and $150K per stage for LG/XL 90% 92% 90% 89% 89% 60 fracs, depending on the service Utilization Price Index 90% Forecast 50 provider 85% 40 11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4 Client Confidential Sources: company documents; field staff interviews; PacWest FracDB / FracFocus.org © PacWest 2012 | All rights reserved | 13
    • EAGLE FORD SUPPLY CHAIN UPDATE Contents 1. About PacWest 2. Eagle Ford Supply Chain Constraints - Hydraulic Fracturing Services - Proppant - Guar Gum - Water 3. Summary Client Confidential © PacWest 2012 | All rights reserved | 14
    • EAGLE FORD SUPPLY CHAIN UPDATE Frac sand is expected to be readily available through 2016 with the only constraints a direct result of transportation/logistics Summary of Frac Sand Market Trends ■ Demand growth moderated due to uncertainty about commodity prices - Frac sand utilization intensity (i.e. sand demand per well) at the US aggregate level has hit a plateau and is not expected to drive meaningful demand increases ■ Supply is expected to increase by nearly 25% between 2012 and 2013: the market is expected to be awash in sand by 2013 - Despite falling prices, frac sand economics still appear strong – one source disclosed operating costs of $22/MT – translating into continued economic incentives to enter the market - Geological and capital barriers to entry are relatively low, i.e. there is lots of decent sand available and capital is available for greenfield and brownfield projects - Recent barrier to entry includes environmental health and safety concerns spurred by silicosis risks; permitting new sand facilities in or near populated areas is becoming more of a challenge ■ Pricing is expected to decline sharply in the near-term but fall moderately in the long-term - Sand suppliers have already discussed a number of contract renegotiations, and indicate they have made price concessions during these sessions - Competitive advantages may now center on logistical capabilities Client Confidential © PacWest 2012 | All rights reserved | 15
    • EAGLE FORD SUPPLY CHAIN UPDATE We forecast moderate growth in the near-term but strong long-term growth in the frac sand market Frac Sand Supply & Demand Trends Frac Sand Supply vs. Demand (MM MT) Discussion 100 ■ We expect frac sand supply to Supply 88 90 grow by 25% between 2012 Demand 80 80 74 and 2013 69 79 70 ■ Supply of frac sand is expected 60 55 67 to surpass demand from 2012 47 60 through 2016 50 44 56 52 40 49 ■ Even coarse grades of sand, heavily constrained in 2010 30 35 and 2011, are widely available 20 in today’s market 10 ■ Demand for fine grades is Forecast 0 expected to increase in 2010 2011 2012 2013 2014 2015 2016 2015/2016, as a result of a gas Metric Growth (‘12-’16) CAGR (‘12-’16) Demand 53% 11% price forecast above $4.50 Supply 60% 13% Client Confidential Source: PacWest Analysis © PacWest 2012 | All rights reserved | 16
    • EAGLE FORD SUPPLY CHAIN UPDATE We forecast that average frac sand prices will drop 8% in 2013 but that price will stabilize through 2016 Frac Sand Pricing Trends (average price: contract + spot) Frac Sand Mine-Gate Price Outlook ($/MT) Discussion $90 ■ Prices are expected to decline over the long-term, but will do $80 so gradually ■ Key exception will be 2013, $70 where price will fall much faster $60 - Recent analysis suggests a $59 drop of nearly 8% between $50 $53 2012 and 2013 $48 $50 $49 $49 $40 ■ The supply/demand imbalance will stabilize after 2013, Forecast resulting in stable prices as well $30 2011 2012 2013 2014 2015 2016 Composite 20/40 30/50 40/70 Source: PacWest Analysis Client Confidential © PacWest 2012 | All rights reserved | 17
    • EAGLE FORD SUPPLY CHAIN UPDATE The use of ceramics and resin-coated sand has increased in the Eagle Ford in 2012 Eagle Ford: Frequency of Proppant Usage Frequency of Proppant Usage (% of wells) Comments 15% Use of RCS & ■ The use of both RCS and 13% ceramics increasing!!! ceramics has been on the rise in early 2012 Frequency of Proppant Usage (% of Wells) 11% ■ The use of ceramics in the 10% 10% 10% 9% 9% Eagle Ford increased 8% 8% 9% 8% dramatically in early 2012 7% 9% 5% 8% ■ Sources in the field validate 6% 5% the increased usage of 5% 5% 5% 5% RCS/ceramics 3% 4% 4% 4% 4% 4% - They report superior 3% 3% 3% 3% production results 0% 0% 0% 0% 1% compared to frac sand in 0% 90 and 180 day IP figures Resin-coated Sand Ceramic Source: PacWest analysis; PacWest FracDB / FracFocus.org Client Confidential © PacWest 2012 | All rights reserved | 18
    • EAGLE FORD SUPPLY CHAIN UPDATE Contents 1. About PacWest 2. Eagle Ford Supply Chain Constraints - Hydraulic Fracturing Services - Proppant - Guar Gum - Water 3. Summary Client Confidential © PacWest 2012 | All rights reserved | 19
    • EAGLE FORD SUPPLY CHAIN UPDATE Constrained supply and increasing demand, exacerbated by hoarding by Indians and stockpiling by OFS drove price surge Supply & Demand Drivers Supply Demand ■ Extremely small 2011 harvest led to ■ Strong oilfield demand increases 2009-2011 seedstock tightness - Continued rig/frac activity increases; shift - Catastrophic monsoon in 2011 led to from gas- to liquids-driven activity: oil well extremely low yields and small harvest consumes 2.5x more gum than gas well ■ OFS stockpiling of guar gum. Aggressive Historic To Early 2012 ■ Limited carryover seedstock - Steady oilfield demand increases since 2009 purchases to build stockpiles and avoid consumed virtually all of 2010 harvest shortages in March-May 2012 ■ Hoarding exacerbated seedstock constraints; - Effectively pulled demand forward, players across all parts of Indian value chain exacerbating demand increases engaged in seedstock hoarding ■ OFS direct sourcing - Increased seedstock constraints and price - Shift in sourcing strategies to direct sourcing increases in early part of 2011-2012 by many medium sized OFS players - Some cases of market manipulation, though - Inflationary factor impacting perceived less important demand Late 2012 ■ Planting expansion in 2012 will increase ■ OFS using previously built up stockpiles; seedstock supply, though unclear to what purchase demand low and prices declining extent Client Confidential © PacWest 2012 | All rights reserved | 20
    • EAGLE FORD SUPPLY CHAIN UPDATE Still too early to determine results of harvest; magnitude of planting increase will determine price, but constraints unlikely Guar Gum Price Outlook Guar Gum Price Forecast, FOB India ($/kg) Discussion $10.0 ■ Price has fallen dramatically from a high of $25/kg in May $9.0 2012 Scenario 1: $8.0 Moderate Planting Increase ■ Customers in ‘wait-and-see’ mode, driving down current $7.0 demand ■ Harvest size still unclear; size $6.0 of planting increase over 2011 will drive size of $5.0 harvest $4.0 ■ Assuming moderate planting Scenario 2: increase (10-20%), expect $3.0 Large Planting Increase prices to range $6-7/kg much of 2013 $2.0 ■ Assuming large increase (100%), expect prices near $3 for most of year Source: PacWest Analysis Client Confidential © PacWest 2012 | All rights reserved | 21
    • EAGLE FORD SUPPLY CHAIN UPDATE Contents 1. About PacWest 2. Eagle Ford Supply Chain Constraints - Hydraulic Fracturing Services - Proppant - Guar Gum - Water 3. Summary Client Confidential © PacWest 2012 | All rights reserved | 22
    • EAGLE FORD SUPPLY CHAIN UPDATE There is little pressure for recycle/reuse of frac flowback water due to wide availability of water and disposal wells Water Demand for Hydraulic Fracturing in the Eagle Ford Water Demand for HF in the Eagle Ford Discussion 130 105,000 ■ Disposal is the main method for Water Required for Hydraulic Fracturing in the Eagle 120 102,434 managing frac flowback given the 110 101,168 abundance of wells 100,000 100 100,488 - Water disposal costs average Average Water / Well (BBL) 90 $2.30/bbl 96,787 80 Ford (MM BBL) 94,645 95,000 - Regulatory pressure is low, 70 Water Required for HF in EF (MM BBL) supporting disposal solutions 60 50 EF Frac Flowback Water (MM BBL) 90,000 - Flowback volumes are relatively low (~10%) 40 Avg. Water/Well (BBL) 30 ■ Water stress is driving interest in 85,000 20 treatment/re-use 10 - EF market for water treatment 0 80,000 services is an estimated $70 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4 million ■ The water pre-treatment market is Year Avg. Water/Well Total EF Water EF Frac Flowback growing substantially, driven by 2011 99,125 bbl 291 MM bbl 29 MM bbl uptake of biocides and scale- 2012 102,278 bbl 409 MM bbl 41 MM bbl inhibitors Client Confidential Source: PacWest Analysis; PacWest FracDB / FracFocus.org © PacWest 2012 | All rights reserved | 23
    • EAGLE FORD SUPPLY CHAIN UPDATE Contents 1. About PacWest 2. Eagle Ford Supply Chain Constraints - Hydraulic Fracturing Services - Proppant - Guar Gum - Water 3. Summary Client Confidential © PacWest 2012 | All rights reserved | 24
    • EAGLE FORD SUPPLY CHAIN UPDATE Near-term Eagle Ford supply constraints are minimal, only short-term, intermittent issues are foreseen until overall US activity ramps up Eagle Ford Supply Chain Summary ■ The upstream supply chain in the Eagle Ford has finally caught up with the rig count; constraints are now minimal ■ Minor shortages are expected from time to time in the near-term, due primarily to problems with planning, logistics, and transportation ■ We don’t expect any major upstream supply chain issues in the Eagle Ford until natural gas prices return and overall US D&C activity ramps up Client Confidential © PacWest 2012 | All rights reserved | 25
    • EAGLE FORD SUPPLY CHAIN UPDATE Questions & Answers ??? Christopher Robart Principal, PacWest Consulting Partners crobart@pacwestcp.com +1 202 352 7805 Client Confidential © PacWest 2012 | All rights reserved | 26