Trends shift in North American, international CT markets

Over the past decade the North American coiled tubing (CT) services market saw a surge in demand as CT units were increasingly deployed for use during hydraulic fracturing operations. E&P companies began demanding CT units for several applications during frack operations, requiring CT units onsite throughout the entire completion and fracturing process.

By 2011, annual CT demand days reached a record, about double the level seen prior to 2007, and day rates exceeded $80,000 in some regions due to constrained unit supply.

This surge in unconventional-related demand structurally altered the CT demand profile from largely workover-related to largely completion-related, with completion-related demand shifting from about 20% share of demand days in 2003 to about 60% share by 2011. With the count of U.S. wells fracked growing, it may seem puzzling that CT demand days then fell about 25% after peaking in 2011.

However, the decline in demand days was driven by three key factors: a substitution to alternative intervention platforms, efficiency efforts across the drilling and completion (D&C) value chain, and reduced CT call-off. Emerging technologies in D&C also may have reduced CT days demanded, but several new completion and frack techniques also add to CT demand, and such technologies still require monitoring to assess long-term impacts to the CT service market.

FIGURE 1. North America land demand profile indicates a recent shift back to workovers and away from completions. (Source: PacWest)

Witnessing how the North American CT market mirrored the rise in unconventional D&C activity, PacWest expects similar dynamics to take place internationally as key plays move beyond appraisal and toward commercial development phases in the coming years.

PacWest views China and the Middle East (particularly Saudi Arabia and Oman) as possessing the most promising development prospects among international markets, but barriers exist to guaranteeing a successful CT growth story abroad.

Historical CT market in North America

Historically, 80% of CT demand in North America was driven by workover-related operations on producing wells. During the period from 2003 through 2011, however, the increase in unconventional activity structurally altered CT demand. Service providers began using CT for a range of completions-related operations, including setting plugs or packers, tubing-conveyed perforating, certain sliding-sleeve operations and milling plugs, among others.

By 2011, the share of CT unit demand related to D&C increased to nearly 60% from 20% in 2003 (Figure 1). The demand distribution has since shifted slightly back toward workover operations due to several factors, including a growing producing well inventory across the U.S., many of which are beginning to require servicing.

Current demand, market trends

PacWest segments the CT market into tiers based on tubing diameter: small CT units (less than 2-in. diameter) are primarily used for workover, wellbore cleanouts and short total measured depth completions, while premium (2 in. to 2? in.) and super premium units (greater than 2? in.) are used for workover and completions in extended-reach and HP/HT wells.

The current fleet of CT units across North America is still weighted toward small-tier units. The Intervention and Coiled Tubing Association (ICoTA) estimated there were 909 CT units across North America in 2013. PacWest estimates that 74% of this fleet was comprised of small-tier CT units. However, small units are currently in oversupply with an estimate less than 50% utilization since 2008. The number of small-tier units is expected to decline 3% between 2014 and 2018, driven by upgrades to higher spec units and redeployment of units abroad.

In contrast, PacWest anticipates the premium and super premium unit counts to increase 8% and 48%, respectively, from 2013 through 2018. Higher spec units are less susceptible to lockup and helical buckling associated with the extended-reach and HP/HT conditions in several unconventional plays.

When looking at demand days, PacWest expects a similar pattern. Small unit demand is expected to decrease slightly from 2014 through 2018. Premium unit demand days are expected to grow modestly, while super premium unit demand days are expected to grow strongly during the same period.

Although PacWest anticipates overall demand days to increase only 3% year-on-year through 2018, the market is not expected to recover to levels witnessed in 2011. The company estimates that CT demand declined nearly 30% from 2011 to 2013. This decline was caused by a combination of three factors: substitution (i.e. competition from snubbing units and, to a lesser extent, tractor-conveyed wireline); increased frack efficiencies; and a shift to call-off units and away from standby.

FIGURE 2. CT services demand days as shown by tier are expected to grow through 2018 by 3% year-on-year. (Source: PacWest)

Future of the market: Competing, emerging technologies

As lateral lengths continue to increase, snubbing units will capture a larger share of completion-related demand from CT. CT and snubbing units offer a number of advantages over traditional workover rigs, including the ability to perform maintenance operations on a live well. E&Ps increasingly employ snubbing units for frack support despite these being more expensive. Snubbing units’ jointed pipe design offers unlimited reach and the ability to operate in HP/HT wells. Depending on the well and circumstances, these benefits may outweigh the speed, safety and cost advantages of CT.

More efficient frack operations and the push to reduce surface equipment use have resulted in the reduction of billable CT days. “Batch” fracturing operations on multiwell pads will drive this shift as one of the largest enablers of frack efficiency gains.

In the first quarter of 2014, 72% of wells were completed either in a batch operation with a zipper frack (fracking wells in series) or back-to-back (fracking wells in parallel). More than 60% of wells in the Bakken, DJ Basin, Eagle Ford, Fayetteville, Marcellus and Utica were drilled on pads in the first quarter.

With respect to efficiencies, PacWest estimates batch completions on multiwell pads have reduced hydraulic fracturing days per well by approximately one day in plays such as the Eagle Ford, Marcellus and Granite Wash.

During the tight market conditions that prevailed from 2009 to 2012, E&Ps paid a standby rate to ensure availability of CT units. The prevailing dynamics resulted in increased utilization and day rates and an overall strong market for CT. However, CT capacity increases and reduced demand from substitutions and efficiency gains resulted in call-off and negatively impacted demand for CT.

In addition to competing platforms, there are a number of emerging technologies with the potential to disrupt CT unit demand in the future. Metallic and polyglycolic acid degradable/dissolvable frack balls that eliminate frack ball drill-out are becoming more widespread. Large internal diameter frack plugs and improved diverting agents are increasingly used, which could reduce plug and perf (PNP) support activities. However, the industry may see some offset with coiled frack that continues to be tested in North America and increased use of PNP over sliding-sleeve completions.

International CT adoption

PacWest expects the international CT market to follow a similar trend to what was witnessed in North America from 2003 to 2008. Similar to the North American land market, frack activity will be a major growth driver for international CT demand in the future. International frack capacity is forecast to grow to 20% per year through 2018 and will likely account for nearly three-quarters of global growth.

Given these assumptions, the international CT unit count is expected to grow 10% per year through 2018. Although conventional well workover requirements will drive the majority of supply, increased frack activity in countries such as China, Russia and Argentina will drive growth in higher spec CT. In total, nearly 650 units are expected to be added internationally from 2013 through 2018 to meet growing demand.

Taking a closer look at the potential for unconventional activity driving the use of CT abroad, China and the Middle East possess the most promising development factors among international markets. This view is based on a combination of measurable factors such as geology, oilfield services capacity and infrastructure along with qualitative factors such as commerciality, regulatory landscape and development constraints.

Local governments will have to work with E&Ps and service providers to ensure that the local supply chain infrastructure is in place to accommodate completions-driven growth. In addition, international markets will have to import technology know-how and experienced crews to replicate the North American CT story abroad.