Halliburton Co., the U.S. leader in pressure pumping services, and Baker Hughes Inc. last week said they have been challenged logistically and supply-wise as producers move from natural gas plays to liquids-rich fields in the North American onshore. New infrastructure is key because “tens of thousands” of wells remain to be drilled in the unconventional plays, said Baker’s CEO.

The oilfield workforces have a learning curve before they can achieve efficiencies, and getting people up to speed has required Halliburton to rely on “commuter crews” to facilitate training, CEO Dave Lesar said last week.

“The shift from natural gas to liquids-rich plays continues and was quite apparent in the fourth quarter,” said Lesar. “The U.S. rig count grew 3% sequentially, with oil-directed rigs up 8% and natural gas rigs down 2%. The shift toward oil and liquids-rich plays are a direct result of the stability of higher oil prices and higher operator returns for these resources.

“Completing these wells requires higher levels of service intensity due to advanced fluid and completion technologies and creates an additional opportunity for us to otherwise differentiate ourselves from the competition.”

For some time Halliburton has seen the impact oil-directed horizontal activity is having on the North American market.

“For instance, in addition to natural gas rigs targeting liquids-rich plays, the oil rig count now represents more than 60% of the total in North America, a level we have not seen in decades. Our customers’ sources of revenue has also shifted dramatically toward oil, with the sale of U.S. oil and liquids representing approximately 70% of total upstream revenue today. This compares with an approximate 50-50 split just five years ago.”

Halliburton’s customer mix continues to shift toward international oil companies, national oil companies and large independents “and away from those customers who might be more financially challenged in the current market,” said Lesar.

“We are also seeing a trend toward higher average footage drilled per well, up to approximately 7,000 feet from 5,000 feet just five years ago…Reserve development demands four times as much horsepower per rig as compared to 2004. So clearly there’s been a dramatic shift over the past several years, and all of this bodes well for a continuation of high demand in the North America unconventional markets.”

The last time the breakeven price for oil development was “so far below prevailing oil prices” was in the early 1980s “when the rig count was more than double what it is today. And despite the vast amount of work we’ve done in North America in recent years, there’s only been a modest increase in net oil production, as new supplies are barely offsetting declines for mature North America basins.

“As a result, we expect continued liquids-driven activity growth in the coming years, as our customers invest in their resources and optimize their development technologies, and we plan to continue to expand our capability and drive efficiency through technology and logistical improvements to enable this growth.”

Logistics and proppant supply also are pressuring the marketplace. “While we have a very sophisticated logistics group, there are times when issues arrive that are not within our control,” said Lesar. “We experienced logistical and proppant supply disruptions in several areas in the fourth quarter, and this impacted the Bakken, Rockies, South Texas and the Permian, all of which had a negative impact on margins.”

Halliburton experienced “inefficiencies associated with frack fleet relocations to address the challenges the industry is facing in 2012…” However, the company remains committed to having a balanced portfolio North America’s dry gas basins and liquids plays because many of its customers operate in both, Lesar said.

“This strategy is now playing out to our advantage. As natural gas prices are falling to the sub-$2.50 level, we are proactively working with these customers to now serve them in the oil plays as they shift their capital spend to liquids and away from natural gas.

The concern about what may happen in North America’s dry gas basins “is a real one,” said Lesar. “However, there are customers who will continue to drill in these basins, as they have a low-cost gas basis, a hedge bought before the collapse of pricing or contracts to send their natural gas to markets where the pricing is better. These are our customers, and they will continue to need our services in the natural gas areas. And in most cases, we have a long-term contract with them that value the efficiencies we bring, so they can continue to make money even at lower prices.

“We have not yet exhausted the demand for fleets that we can relocate to those customers who want our services in the liquids basins, and we will continue to do that as necessary. We have established a great position in the U.S. market. And in these uncertain times, I believe that will pay off big for us.”

Baker plans to “significantly” increase North American onshore infrastructure investments in several basins to make its operations more efficient and to prepare for the long term, CEO Martin Craighead said last Tuesday. The former COO, who took the helm this year after CEO Chad Deaton retired, said Baker’s profits declined in the final period from a year earlier as it also faced issues that stemmed in part to adjusting to the shale shift.

“North American results were disappointing,” said Craighead. “We had a strong performance that was offset by problems in pressure pumping where we experienced a variety of cost and efficiency challenges in ramping up demand…We expect it to take time, but we are taking steps to fix these problems.”

Logistics and workforce problems are related to the company’s hydraulic fracturing services, which was built with the acquisition of BJ Services Co. in 2009 (see NGI, Sept. 7, 2009). BJ gave Baker a major entry into pressure pumping; at the time 75% of BJ’s business was in pressure pumping. However, Baker wasn’t able to put some of BJ’s advantages to work because of problems that had been detected early last year, Craighead admitted.

Among other things Baker “experienced inefficiencies associated with freight, fuel and other logistical operations, where we experienced significant shortages of specific sizes of proppant, gel…[there were] shifted demand curves, and product costs escalated. The shortages impacted operational efficiency and we incurred incremental costs on new crews in anticipation of growth in 2012…

“We clearly understand these issues and expect it to take some time, but we are taking steps to fix these problems. We are investing in our fleet to make it more efficient and in facilities to support our fleets to store sand, consumables and rail…”

Baker plans to invest in “seven new major facilities within our North American land operations, each in unconventional basins,” said the CEO. “In addition, we plan to accelerate our investments in the pressure pumping supply chain to lower the high costs associated with freight, etc.”

Baker, which compiles a leading indicator for oil and natural gas rigs in North America, expects the 2012 rig count to grow by 5% to 2,409 total rigs this year, but the exit rate is expected to be flat compared with 4Q2011. By the end of the year Baker is forecasting the gas rig count to decline by around 218, while oil rigs are expected to increase by 220.

North America’s long-term prospects look solid on every front, said Craighead. “What I say at this stage is the increase in oil basins are offsetting compression in gas basins…Obviously… people are repositioning fleets given the apparent oncoming softness in some of the gas basins…[but] this market…is in the very early stages of unconventional plays.

“That might be very hard for a lot of people to understand…but in talking to customers, tens of thousands of locations are coming up in the discussions” about future drilling “in the Marcellus, Eagle Ford and even the Utica” shales. “When you see that kind of outlook, you can’t help but conclude that adding additional capacity in pressure pumping, but also in roof line, in tools, is absolutely the right way to go forward. There may be a little bit of weakness until things settle down, but overall, we don’t expect any softness…and we wouldn’t expect there to be anything dramatic, even if prices soften in a couple of places.”

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