Report: Half of U.S. fracking companies will go out of business this year

The precipitous fall in oil prices in recent months has led to a lessening of demand for fracking services.  Where once there were more than 60 companies engaged in hydraulic fracturing, there are now 41.  And one industry expert expects that number to halve over the coming year as demand slides even further.

Bloomberg:

Half of the 41 fracking companies operating in the U.S. will be dead or sold by year-end because of slashed spending by oil companies, an executive with Weatherford International Plc said.

There could be about 20 companies left that provide hydraulic fracturing services, Rob Fulks, pressure pumping marketing director at Weatherford, said in an interview Wednesday at the IHS CERAWeek conference in Houston. Demand for fracking, a production method that along with horizontal drilling spurred a boom in U.S. oil and natural gas output, has declined as customers leave wells uncompleted because of low prices.

There were 61 fracking service providers in the U.S., the world’s largest market, at the start of last year. Consolidation among bigger players began with Halliburton Co. announcing plans to buy Baker Hughes Inc. in November for $34.6 billion and C&J Energy Services Ltd. buying the pressure-pumping business of Nabors Industries Ltd.

Weatherford, which operates the fifth-largest fracking operation in the U.S., has been forced to cut costs “dramatically” in response to customer demand, Fulks said. The company has been able to negotiate price cuts from the mines that supply sand, which is used to prop open cracks in the rocks that allow hydrocarbons to flow.

Oil companies are cutting more than $100 billion in spending globally after prices fell. Frack pricing is expected to fall as much as 35 percent this year, according to PacWest, a unit of IHS Inc.

There are several reasons for the big tumble in oil prices.  Here are a few:

Four things are now affecting the picture. Demand is low because of weak economic activity, increased efficiency, and a growing switch away from oil to other fuels. Second, turmoil in Iraq and Libya—two big oil producers with nearly 4m barrels a day combined—has not affected their output. The market is more sanguine about geopolitical risk. Thirdly, America has become the world’s largest oil producer. Though it does not export crude oil, it now imports much less, creating a lot of spare supply. Finally, the Saudis and their Gulf allies have decided not to sacrifice their own market share to restore the price. They could curb production sharply, but the main benefits would go to countries they detest such as Iran and Russia. Saudi Arabia can tolerate lower oil prices quite easily. It has $900 billion in reserves. Its own oil costs very little (around $5-6 per barrel) to get out of the ground.

The main effect of this is on the riskiest and most vulnerable bits of the oil industry. These include American frackers who have borrowed heavily on the expectation of continuing high prices. They also include Western oil companies with high-cost projects involving drilling in deep water or in the Arctic, or dealing with maturing and increasingly expensive fields such as the North Sea. But the greatest pain is in countries where the regimes are dependent on a high oil price to pay for costly foreign adventures and expensive social programmes. 

In effect, fracking has become a victim of its own success.  As businesses became more efficient at flushing oil and gas out of shale, the cost of getting the oil out of the ground fell, fueling a glut in supplies.  This was exacerbated by weakening economies in western Europe and China, as well as a desire by the Saudis to destroy the American fracking industry.  The Kingdom is now at near full produduction capacity, with no signs that they, or other Arab Gulf states, will turn down the spigot anytime soon. 

The good news is that once the price begins to rise again, other fracking start-ups will jump into the market.  In essence, the Saudis and OPEC are fighting a rear guard action against the inevitable decline of their market share as fracking takes off worldwide.  They are the dinosaurs 60 million years ago watching as the meteor hits the Earth and burying their heads in the ground. 

The precipitous fall in oil prices in recent months has led to a lessening of demand for fracking services.  Where once there were more than 60 companies engaged in hydraulic fracturing, there are now 41.  And one industry expert expects that number to halve over the coming year as demand slides even further.

Bloomberg:

Half of the 41 fracking companies operating in the U.S. will be dead or sold by year-end because of slashed spending by oil companies, an executive with Weatherford International Plc said.

There could be about 20 companies left that provide hydraulic fracturing services, Rob Fulks, pressure pumping marketing director at Weatherford, said in an interview Wednesday at the IHS CERAWeek conference in Houston. Demand for fracking, a production method that along with horizontal drilling spurred a boom in U.S. oil and natural gas output, has declined as customers leave wells uncompleted because of low prices.

There were 61 fracking service providers in the U.S., the world’s largest market, at the start of last year. Consolidation among bigger players began with Halliburton Co. announcing plans to buy Baker Hughes Inc. in November for $34.6 billion and C&J Energy Services Ltd. buying the pressure-pumping business of Nabors Industries Ltd.

Weatherford, which operates the fifth-largest fracking operation in the U.S., has been forced to cut costs “dramatically” in response to customer demand, Fulks said. The company has been able to negotiate price cuts from the mines that supply sand, which is used to prop open cracks in the rocks that allow hydrocarbons to flow.

Oil companies are cutting more than $100 billion in spending globally after prices fell. Frack pricing is expected to fall as much as 35 percent this year, according to PacWest, a unit of IHS Inc.

There are several reasons for the big tumble in oil prices.  Here are a few:

Four things are now affecting the picture. Demand is low because of weak economic activity, increased efficiency, and a growing switch away from oil to other fuels. Second, turmoil in Iraq and Libya—two big oil producers with nearly 4m barrels a day combined—has not affected their output. The market is more sanguine about geopolitical risk. Thirdly, America has become the world’s largest oil producer. Though it does not export crude oil, it now imports much less, creating a lot of spare supply. Finally, the Saudis and their Gulf allies have decided not to sacrifice their own market share to restore the price. They could curb production sharply, but the main benefits would go to countries they detest such as Iran and Russia. Saudi Arabia can tolerate lower oil prices quite easily. It has $900 billion in reserves. Its own oil costs very little (around $5-6 per barrel) to get out of the ground.

The main effect of this is on the riskiest and most vulnerable bits of the oil industry. These include American frackers who have borrowed heavily on the expectation of continuing high prices. They also include Western oil companies with high-cost projects involving drilling in deep water or in the Arctic, or dealing with maturing and increasingly expensive fields such as the North Sea. But the greatest pain is in countries where the regimes are dependent on a high oil price to pay for costly foreign adventures and expensive social programmes. 

In effect, fracking has become a victim of its own success.  As businesses became more efficient at flushing oil and gas out of shale, the cost of getting the oil out of the ground fell, fueling a glut in supplies.  This was exacerbated by weakening economies in western Europe and China, as well as a desire by the Saudis to destroy the American fracking industry.  The Kingdom is now at near full produduction capacity, with no signs that they, or other Arab Gulf states, will turn down the spigot anytime soon. 

The good news is that once the price begins to rise again, other fracking start-ups will jump into the market.  In essence, the Saudis and OPEC are fighting a rear guard action against the inevitable decline of their market share as fracking takes off worldwide.  They are the dinosaurs 60 million years ago watching as the meteor hits the Earth and burying their heads in the ground.