American Oil and Gas Reporter - September 2020 - 36

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WellFracturing: Market Dynamics
Treadmill Of Depletion

www.aogr.com), lifting off the year's
lows of 45 in mid-May (Figure 1). There
were about 40 spread activations over
the course of three and a half months
from the May bottom, but the shift
higher faces resistance in the final quarter
of 2020. The increase off the lows was
driven by a muted recovery in activity
in the Permian, Appalachia, Bakken and
Eagle Ford. We have seen some one-off
activations in fringe or liquid-rich basins,
but the work is typically spot and
wrapped up within several weeks. The
real drivers have been the large basins
where companies can achieve some
economies of scale and have direct
access to end-users, whether it is a
refiner or exporting facility.
After achieving a record high of 13.1
million barrels a day of oil production in
the first quarter of the year, the pandemic
forced an economic lockdown that saturated the U.S. refining complex and
slowed global demand for light, sweet
barrels. The truth is shale was already
facing a ticking time bomb in late 2019.
The physical oil markets were showing
cracks well before the rise of COVID-19
and the OPEC+ coalition abandoning its
stated production limits. Realized prices
in Europe and Asia were trading well below listed prices, and the increase in
supply from key producers Saudi Arabia
and Russia came at the worst time on the

Producers have to complete a minimum
number of new wells to avoid the treadmill
of depletion, or risk seeing their production
volumes go backward. The longer the
frac spreads sit idle, the faster the treadmill
turns as initial rates from the most recent
completions drop. To counter that, producers are shifting to protect production
and limit annual decline rates to 10%15% by taking creative actions to put
themselves in a good position for next
year. They hope to accomplish that through
a balance of completing a certain amount
of new wells (new drills and drilled-butuncompleted wells), conducting workovers
and refracturing to optimize existing wells,
and other tactics to manage decline curves.
Many attributes come into play for
operator strategies, including pipeline
takeaway (firm transport/minimum volume
commitments) or capacity availability,
hydrocarbon mix (liquids versus gas),
offsetting well performance (parent versus
child wells), end-use markets, realized
prices and basis differentials, hedge portfolios, etc. We believe these actions will
only require an average of 105-110 completion crews throughout the remainder
of this year.
Across the United States, the demand
for completion crews rose to a running
level of 89 as of mid-September (see
current weekly frac spread count at
FIGURE 1

U.S. Frac Spread Count versus Weekly and Annual Comparisons
500
450

Frac Spreads

400
350
300
250
200
150
100
50

Source: Primary Vision LLC

36 THE AMERICAN OIL & GAS REPORTER

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very eve of a complete shutdown of many
national economies.
This summer, demand has been slow
to return as the global refining complex
maintains reduced rates and has begun
announcing extended downtime throughout the shoulder season. We have seen
many developed and emerging economies
struggle to break plateaus of activity,
which has limited the demand for oil in
the broader markets as refined product
gluts persist.
Maintaining Production
By mid-August, the U.S. Energy Information Administration reported that
oil production already had collapsed by
2.4 MMbbl/d in the five months since
March. By comparison, it took three
years (2016-18) with high sustained rig
and frac spread counts to grow production
on the Texas side of the Permian Basin
by only 1 MMbbl/d, according to Texas
Railroad Commission data. When it
comes to tight oil production, what goes
up comes down a lot faster and a lot
more dramatically.
With that in mind and assuming that
U.S. oil production will exit 2020 in a
forecasted range of 10.5 MMbbl/d-10.7
MMbbl/d, we estimate it would take at
least 150 spreads for producers to achieve
flat oil production (100% maintenance
with 0% growth) in 2021. Given the lack
of total demand in the market, achieving
13.1MMbbl/d again is a very long way
off, and would require on the order of
325 active spreads. Completion activity
through the end of 2020 will pick up, but
it is likely to peak at about 115 spreads,
achieving a stronger average off the lows,
with a four-week rolling average of 87
in September (Figure 2). That was up
from four-week averages of 76 in August
and 72 in July.
This trend of a gradual increase will
have to continue into 2021 if the market
is to reach the 150-spread count needed
to offset declines in U.S production due
to depletion. Demand for frac spreads is
rising in the Permian and Eagle Ford,
with stable activity remaining in the
Bakken, Appalachia, Anadarko, Western
http://www.aogr.com
American Oil and Gas Reporter - September 2020

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