Frac crew shortage may push oil's biggest bubble to 2018

CHICAGO and HOUSTON (Bloomberg) -- Shale explorers pushing to expand oil production are struggling to find enough fracing crews after thousands of workers were dismissed during the crude rout.

Independent U.S. drillers underspent their first-quarter budgets by as much as $2.5 billion collectively, largely because they couldn’t find enough fracing crews to handle all the planned work, according to Infill Thinking LLC, a research and consulting firm focused on oilfield services and exploration. If the scarcity holds, output increases planned for this summer may get pushed into 2018, creating an unanticipated production bulge with “scary” implications for oil prices, said Joseph Triepke, Infill’s founder. 

In some cases, active crews are walking away from jobs they signed up for months ago -- and paying early-termination penalties -- to take higher-paying assignments with other explorers. Workers earn anywhere from $29,000 to $72,000/year before overtime, depending on the company and the region.

The tight fracing market “means U.S. oil production growth this year will be back-half weighted, and we may not understand the full extent of U.S. production growth until early 2018,” said Triepke, who previously was an analyst at Citadel LLC’s Surveyor Capital unit. “This point is particularly scary if you are rooting for higher oil prices.”

Oilfield-service companies contributed the largest chunk of more than 441,000 jobs slashed globally as prices plunged from more than $100/bbl over the last three years, according to Houston-based industry consultant Graves & Co.

Now, with the price of oil settling at around $50/bbl, shale drillers are once again gearing up in areas such as the Permian basin, where break-even costs are as low as $30/bbl. The result: rising competition for workers and equipment, which means higher costs. Fracing companies are now charging 60% to 70% more than a year ago as explorers engage in bidding wars to lock up crews, according to Infill data.

In response, servicers are scrambling to re-hire hands and retrieve gear from storage, said  Andrew Cosgrove, an analyst at Bloomberg Intelligence.

Typical crew

A crew typically consists of 25 to 30 workers who operate a huge array of powerful truck-mounted pumps, storage tanks for fluids and sand, hoses, gauges and safety gear. Fracing, which involves pumping tons of water, sand and chemicals into a well to smash open the surrounding oil- and gas-soaked rock, is the most expensive part of drilling a well, usually accounting for about 70% of the total cost.

So far, independent shale drillers are confident they’ll find ample fracking capacity and are leaving their ambitious double-digit output growth targets intact. West Texas Intermediate crude, the U.S. benchmark, is heading for a second weekly advance as U.S. stockpiles decline while Saudi Arabia and Russia indicate a willingness to extend price-boosting production cuts.

Those efforts could be dashed in coming months, however, if shale explorers deliver a larger-than-expected bubble of supply.

“Every single pressure pumper is saying their order books are full through the third quarter and some as far ahead as the first quarter of ’18,” Cosgrove said.

Walkaways

EQT Corp. was left short of fracing crews during the first quarter when some pumping companies walked away for higher-paying contracts. Still, the Pittsburgh-based shale driller expects to attract enough fracing capacity by the beginning of June to stay on track and hit its full-year growth forecast.

“A couple of our frac contractors decided to pay us the penalties to take their frac crews to jobs that were more profitable,” EQT CEO Steven Schlotterbeck said during an April 27 conference call with analysts. “So we will get some penalty fees but that obviously is far less than the value of having the wells fraced on the schedule that we would have liked.”

The last time the shale patch boomed, Parsley Energy Inc. CEO Bryan Sheffield remembers personally delivering breakfast and giving away World Series tickets to get into good graces with fracing companies.

Better-paying gigs

That was late 2011, when booming demand for fracing capacity meant service companies could fire clients to take better-paying gigs, Sheffield said in an interview. The 39-year-old Parsley founder was relatively unknown at the time, trying to get to the top of frac companies’ cancellation lists, so he could get a chance to hire them and get his oil flowing.

Those days are back, he said.

After the last boom that saw oilfield truck drivers commanding more than $200,000 a year in the Bakken of North Dakota, companies are again hunting for more truckers -- this time in the Permian basin of Texas and New Mexico for hauling water, sand and oil. Fracing equipment prices began rising late last year, Sheffield said.

“This is exactly what we saw in 2011 and 2012,” Sheffield said. “The bottleneck moves down the chain.”