Completions Work Plummets In Dry Gas Shale Basins

Synopsis

As in drilling, the slowdown that has hit the oil markets has come full force to the well servicing market in the dry gas basins, including the Barnett, Fayetteville and Haynesville shales. Operators are taking a “wait and see” approach to commodity prices and are only doing work necessary for maintenance. Well service companies have cut hourly rates to customers. The benchmark 500 series rig has witnessed an 18% drop in basic hourly rates sequentially, although rates are down 24% on average across all rig classes. If conditions continue, cuts to hourly wages and lay offs are likely. Routine maintenance has jumped from 28% of job mix in the fourth quarter 2014 to 65% in the current survey while completion work fell from 35% in the fourth quarter to 15% currently, reflecting the sharp decrease in drilling and completions.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Down QTQ
  [See Question 1 on Statistical Review]
  ​All respondents said that rig demand continued to slow QTQ as oil prices, then gas prices continued to weaken. Most well service companies are seeing more maintenance jobs than other workover service as drilling levels slowed down.
  • Top-Tier Well Service Manager: “Everything has slowed down considerably. Across the board, big energy companies are keeping their money so they are not hiring jobs unless something is broken.”

• Number of Rigs Excessive
  [See Question 2 on Statistical Review]
  All of the respondents said that there is now an excessive amount of rigs in the Dry Gas Basin areas, as operators are seeking ways to control cost and are only doing what work is necessary.
  • Mid-Tier Operator: “Initially, we dropped rigs in the oil rich areas to focus on gas. In October through December, oil was dropping so we moved out of oil and towards gas, which was still $4, but now gas is at $2.55 this morning and we are changing our tune for the remainder of the year.”

• Well Service Companies Mostly Evenly Split Tasks
  [See Question 3 on Statistical Review]
  ​Among all respondents, routine maintenance accounts for 65% of work, completions account for 15%, plug and abandonment (P&A) work accounts for 9% and standard workover jobs accounts for 11% of work performed.
  • Mid-Tier Operator: “We are doing only what is necessary, which means we are maintaining the wells we have and sitting back and waiting to see what happens next.”

• Use of Coiled Tubing Not Growing
  [See Question 4 on Statistical Review]
  None of the respondents were using coiled tubing and did not expect use to grow in the area.

• Hourly Rates Consistent Among HP Series
  [See Question 5 on Statistical Review]
  ​The hourly rate for the popular size 500 HP series is $285/hour, which reflects the discount contractors are giving in response to lower oil prices. See Table I for Average Hourly Rates.
  • Mid-Tier Operator: “We have not asked for concessions on current contracts but we are beginning to have those discussions. We are not doing work that is not necessary.”

Table I. – Average Rates for Certain Workover Rig Sizes in the Dry Gas Basin area

• Hourly Rates Down QTQ
  [See Question 6 on Statistical Review]
  ​Hourly rates for well service rigs are down 24% on average, with all respondents saying that continued low oil prices would create additional downward pressure on pricing throughout 2015.
  • Mid-Tier Well Service Manager: “We have not cut any employees but we have cut wages to our salaried, but not our hourly employees. We have our eight workover rigs out working, and they have been for the last three weeks. We are playing the game and adjusting rates. We don’t operate under any contract.”

• No New Competition
  [See Question 7 on Statistical Review]
  ​All respondents said that competition had not increased as most companies were focusing on relationships and maintaining costs.
  • Mid-Tier Operator: “We are not seeing any new competition.”

• Strategies Vary Among Companies
  [See Question 8 on Statistical Review]
  ​The respondent said that they are focusing on necessary work and controlling cost by not undertaking anything else. One respondent said adjusting rates to the marketplace was their strategy, while two said they would have to start offering concessions and have already begun those conversations. One respondent said that they were looking for opportunities in this downturn.
  • Mid-Tier Well Service Manager: “In our part of the well servicing industry, there have been some layoffs, not in this area, but most are doing what we are doing: reducing rig rates, reducing salary employees and some companies have cut their hourly employees. Batten down the hatches and work through the storm is the strategy.”

• Most Wells Are Completed
  [See Question 9 on Statistical Review]
  ​Five of the eight respondents said they are not hearing about wells being drilled and then not completed in the Dry Gas Basin area. However, three respondents did say they had heard operators were doing this, but they themselves were completing the wells they drilled.
  • Mid-Tier Operator: “We are not seeing operators not complete wells they are drilling. We are not doing as much completion because the drilling has slowed down.”

End Survey Findings

Survey Demographics

H A R T E N E R G Y researchers completed interviews with eight industry participants in the workover/well service segment in dry gas basins within the Ark-La-Tex region, including the Barnett Shale, Haynesville Shale, and Fayetteville Shale areas. Participants included three oil and gas operators and five managers with well service companies. Interviews were conducted during early April 2015.

Part II. – Statistical Review

Workover/Well Service

[Dry Gas Basins]

Total Respondents = 8
[Oil & Gas Operators = 3, Well Service Companies = 5]

1. Do you expect demand for workover rigs to grow, remain the same, or shrink in 2Q15 compared to 1Q15?
Shrink: 8

2. Would you characterize the supply of rigs in your area as excessive, sufficient, or insufficient to meet 1Q15 demand?
Excessive: 8

3. Looking at your slate of well service work—on a percentage basis—how much of it is standard workover vs. routine maintenance vs. plug & abandonment (P&A) vs. completion work?

4. How are coiled tubing (CT) units impacting your company's slate of work? Would you say CT units are getting more, less or the same amount of work that would have gone to work over rigs compared to six months ago?
Do not use coiled tubing 8

5. What size (horsepower) workover rigs do you own? What is a representative rate for this size workover rig in your area?
[Rates shown are an average rate among all respondents in the category.]

6. Do you expect workover rig hourly rates to increase, remain the same or decrease over the next 3 months?
Down 10% 1
Down 18% 1
Down 20% 4
Down 30% 1
Down 50% 1
Average Down 24%

7. Have you noticed competitors from other regions entering your area? What has been the effect on your fleet's utilization and hourly rates?
No 8

8. What strategies are companies putting in place to cope with the low oil prices?
Doing only the work that is necessary 3
Expecting to have to offer price concessions 2
Looking for opportunities 1
Only doing maintenance work 1
Adjusting our rates 1

9. What are you seeing in terms of the number of wells being drilled but not completed?
Hear companies are not completing, but we are 3
Not hearing about operators not completing 3
General slowdown in drilling and completions 2