Part 1: Improving returns with growth
The astonishing pace at which the US Light Tight Oil (LTO) market bounced back has once again propelled hydraulic fracturing to the forefront. Driven by several multiplicative factors (including increased lateral lengths and tighter stage spacing) the number of stages fractured has increased by over 100 percent in less than two years.
With oil prices nearing three-year highs, there’s no reason to think that demand for horizontal resource plays will diminish anytime soon. In fact, Accenture Strategy’s most bullish projections have US LTO production growing from approximately 7 Mmbbl/day now to 12+ Mmbbl/day by 2023 (see Figure 1).1 While this is generally good news for the fracturing industry, it presents challenges for oil field service (OFS) companies that are not only facing industry “headwinds” such as capacity overhang, continued volatility and supply chain disintermediation, but also known struggles with critical equipment, people and infrastructure, and environmental pressures.
A simple multiplication of the “inputs” will exacerbate the system issues further and continue to result in unacceptable returns. To meet the growing demand for LTO, our analyses suggest that these companies will need to more than double their marketable supply of hydraulic horsepower (HHP), hire an additional 500 frac crews comprising approximately ~20,000 field personnel, and increase proppant supply from 87 billion pounds today to more than 250 billion pounds per year in 2023, driven by increasing proppant loading per well.2
Figure 1. US LTO growth will require significantly more resources
Our experience shows that to achieve profitable growth in this environment (see Figure 2), OFS companies in the hydraulic fracturing industry need to do three things differently: reduce capital intensity while improving equipment reliability; enhance surface efficiency; and improve reservoir recoverability by improving well productivity. This BizTech Byte will examine how companies can reduce their capital intensity. The next article in this series will focus on efficiency and productivity plays.
Figure 2: Return on capital for publicly traded frac operators
Reduce capital intensity while improving equipment reliability
It took the airline industry over 100 years after the first powered flight to apply proven lean manufacturing principles and rigorous preventative maintenance practices, standardize parts, services, and processes, and streamline their equipment specifications (e.g., Southwest Airlines only operates 737s). Hydraulic frac horsepower continues to be delivered via decades-old technology requiring a large footprint [approximately 20 pump trucks per fleet], significant CAPEX [approximately $35-45 million per fleet] and high operating expenses ($8-10 million per fleet per year).3 The shift to Frac 2.0 will enable companies to operate their equipment more profitably and sustainably. We believe three components of this future equipment environment stand out:
- Next Generation Frac Pump (More HHP + Longer Stroke):
With a longer stroke pump, fleets can run pumps more slowly, thereby extending an asset’s consumable life by more than 30 percent—without any change in horsepower, pressure and flow rate compared to current scenarios.4 Additionally, a larger HHP pump could structurally reduce the number of equipment assets onsite and decrease maintenance cost by more than 50 percent.5
- Alternative / Multi-Fuel Power Source:
Switching to dual-fuel engines or gas turbines would enable companies to use larger HHP pumps. That would, in turn, enable them to reduce fuel costs by up to 40 percent and reduce noise and environmental emissions—all while being integrated into a single trailer to enable quick mobilization.6
- Prescriptive Equipment Management & Data Driven Insights:
The Frac 2.0 era of equipment will need to be outfitted with the latest sensors and automations such as standby controllers and electronic frac controls. Such technical advances will enable field crews or remote centers to monitor, record and analyze all operational parameters such as volumes and RPMs in real-time. These insights will inform performance optimization decisions.
Examples of potential advanced analytics include HHP/fuel consumption and crew productivity/efficiency. Advanced analyses of power generation will help drive stage performance (e.g., power transmission to HHP optimization). And pump stroke and vibration analytics will help companies predict equipment failure and optimize predictive maintenance practices. With these types of data-driven insights, companies can expect to reduce their equipment/crew footprints, as well as their fuel consumption, by more than 50 percent.7 The total impact could equal a 30 percent (or more) reduction in lifecycle costs over a 10-year period (see Figure 3).8
Figure 3: Analytics enable companies to operate more efficiently
Reducing capital intensity by rethinking equipment reliability is an important way for oil and gas companies to achieve a competitive edge in the Frac 2.0 era. But it is not the only strategy at their disposal. In Part 2 of this Frac (R)evolution series, we will describe how the fracking industry can take further inspiration from the airline industry to not only do more with less to improve efficiency, but also leverage scientific models and advanced analytics to improve productivity.
1 Accenture Strategy analysis, 2018.
3 Westwood Global Energy Group, 2017, and Accenture Strategy analysis, 2018.
4 American Oil & Gas Reporter and Accenture Strategy analysis, 2018.
6 Accenture Strategy analysis, 2018.