Cost & Price Analysis
As a result of the shale revolution in North America, the demand for chemicals utilized in well stimulation grew significantly, however, without a corresponding supply capacity increase. This, in turn, created an undersupplied market, which drove up prices. When the supply picked up, prices stabilized and with the oil price slump, an oversupply of chemicals is imminent. These supply and demand swings introduce price volatility for the chemicals used in well stimulation.
Trucking and storage/tanking capacities, being key parts of the services, are driven by pure supply and demand fundamentals. Hence, unless owned by a service company, the prices of this equipment are volatile and depend on many other industries outside of the oil and gas industry. Price dynamics of coiled tubing equipment as a deployment method are under pressure too.
Prices are expected to continue sliding down in 2nd half of 2020 due to oversupply. Yet, this may be affected by contractors cold stacking, writing off their old and non-competitive assets
The overwhelming majority of the equipment is manufactured by third parties. Service providers build up their fleet based on their requirements. There may also be cases when the trucking and storage/tanking capacities, being the most CAPEX intensive asset, will be outsourced on a rental basis. In addition, the chemicals used in well intervention are produced by major chemicals' suppliers.
This category is a relatively high fixed cost segment; hence, sustained revenue generation for contractors is of the utmost importance. Key cost drivers are:
- Acquisition cost. This is one of the biggest costs for service companies. The average price of a complete stimulation equipment package is between US$1m and US$6m.
- Maintenance costs. Maintenance costs are highly driven by the type of chemicals. Corrosive nature of the stimulation chemicals greatly reduces the working life of the equipment. Apart from this, maintenance is geared towards routine and preventative programmes.
- Personnel costs. Key operational personnel are usually provided by a service company. Due to the call out nature of the services, employment patterns are mixed between permanent staff and a pool of temporary personnel. Over the last 3 years, personnel costs exhibited a significant downward trend due to the industry downturn, ample supply of personnel and the nature of the relatively low-skill job for some positions.
- Chemicals costs. The majority of chemicals used in well stimulation are highly commoditized. Both, matrix acidization and acid fracking use large quantities of hydrochloric acid (high concentration HCI), together with water and a variety of other chemicals, including gels, proppants and other agents and additives. 75% of the demand for HCl is driven by companies outside of the oil industry, such as PVC and polyurethane production, and around 25% is made available for swimming pool disinfection, steel pickling, the food industry and others. If no supply capacity is created, prices for HCI can be volatile and may witness an increase when activities pick up. Another major cost contributor is the logistics of the HCI, which can be costly and inefficient, as it is concentrated in the water when transported. Locating a closer source of HCI would thus be beneficial.