• Vertical well drilling gains share in a softening market
  • Permian operators experimenting with refracks
  • Survival an issue as weakening demand impacts regional workover and pressure pumping firms

The good news is that unconventional oil and gas activity has held up better in the Permian Basin than in any other market. The bad news is that industry indices such as the Baker Hughes rig count show activity down more than 50% from the fourth-quarter 2014 peak.

Utilization for drilling rigs regionally fell to 36% at year-end 2015, and drilling contractors’ mindsets are acquiescing to the potential reality that the market for land drilling rigs might not improve meaningfully in 2016. Average rig rates dropped $1,000 per day in just 90 days at year-end 2015 to $16,000 for the benchmark 1,500-hp AC-VFD Tier I drilling unit. Hart Energy surveyors found some contractors quoting spot market rates of $15,000 but finding few takers. Many Permian oil and gas operators are not willing to drill at the moment, regardless of pricing. Work, when available, is on a well-to-well basis, though there are a few contracts remaining with terms that run a few months.

Similarly, there is little rest for weary well stimulation service providers in the Permian Basin. The outlook among well stimulation service providers was mixed at year-end 2015, according to those participating in the Hart Energy field service surveys, with half of respondents expecting little increase in demand during first-quarter 2016 while the other half expects demand for well stimulation services to fall further. The main culprit in sentiment erosion is the continuing and unexpected drop in commodity prices. Some well stimulation providers indicate the current climate will hasten issues of survival for cash-strapped regional pressure pumpers.

The job mix in fourth-quarter 2016 finds a few operators shifting back to vertical wells to keep costs down and cope with the low-price environment. The average price per stage has fallen to $34,000, although average Permian Basin pricing incorporates lower cost work for vertical wells. Operators are drilling fewer wells and completing those one well at a time while pressuring service providers for additional cost cuts. The evidence is found in the fact that zipper fracks, as a percentage of all completions, fell to 42% of wells among those surveyed at year-end 2015, down from 56% of completions at the end of third-quarter 2015. Zipper fracks are a proxy for batch completions, and this suggests the backlog of drilled but uncompleted wells continues to rise in the Permian.

Operators have settled on “tried and true” practices for downhole completions, which entails slickwater fracks, stage spacing of 76 m (250 ft) and plug-and-perf methodology. Proppant use remains high at 7.9 million pounds per lateral on average, down incrementally from the 9 million pound average at the end of third-quarter 2015 but likely reflecting interview sampling weighted to the Midland Basin. That switch in interview sampling also revealed a growing component of vertical wells, which represent 26% of wells drilled among survey respondents vs. the 74% that employ enhanced completion technology.

Well stimulation service providers pointed to experimental work on Permian Basin refracks, with operators trying different mechanical approaches. However, refrack marketshare is still low.

Sentiment among Permian Basin workover contractors reflects that of their colleagues on the drilling side. Survey participants see demand for workover services getting weaker in first-half 2016. Operators are reducing spending to adjust to a cash flow neutral world, with more spending cuts coming in first-half 2016. Routine maintenance accounted for more than 70% of job mix at year-end 2015 compared to 60% in third-quarter 2015. Meanwhile, a price war has broken out for the shrinking workover pie between the larger public and smaller privately held well service providers.

Contractors intend to stay lean until 2017.

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