Suppliers to Oil & Gas Industry Share Pain of Drilling Slowdown

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--The collapse of crude-oil prices over the last nine months has taken its toll on critical suppliers to the Oil & Gas Industry, such as steel pipe mills and proppant providers. In recent years, those suppliers grew dramatically, in lockstep with soaring domestic crude-oil production. But in recent months, their fortunes have fallen along with crude-oil prices.

U.S. crude-oil production nearly doubled from 2009 to 2014, from about 5 million barrels per day (BBL/d) to about 8.68 million BBL/d, and minor increases in production are forecast for 2015 and 2016, according to the U.S. Energy Information Administration (EIA) (Washington, D.C.). But the days of 15%-to-20% annual production growth receded as global demand slowed and global crude-oil production continued to rise.

Click on the image at right to see a detailing U.S. oil production since 1990.

"Since 2011, we have tracked the completion of about $4.5 billion in frac sand and proppant projects, and while we are still tracking about $1 billion of active projects in that industry, we also show about $1 billion of projects have been placed on hold or cancelled," said Joseph Govreau, Industrial Info's vice president of research for the Metals & Minerals Industry. "We're seeing the same effect in the steel pipe industry: companies are delaying or scaling back some projects as their customers experience sharply lower demand for their product."

In North America, the number of horizontal drilling rigs has fallen by nearly half over the last six months, to about 741 in late April from 1,372 in late November 2014, according to Baker Hughes Incorporated (NYSE:BHI) (Houston, Texas).

Click on the image at right to see a graph detailing the declining number of horizontal drilling rigs active in North America.

Three steel pipe mill projects totaling about $475 million in total investment value (TIV) have been placed on hold so far this year, according to Industrial Info's North American Industrial Project Database. Further slowdowns are possible. At least one major frac sand project has been cancelled outright, and several others have been pushed back until market conditions improve. Frac sand producers expect to cut shipments 25% or more this year compared to 2014, which was a record year for production, Govreau said, citing recent research from the U.S. Geological Survey (USGS) (Reston, Virginia).

Govreau and his colleagues from Industrial Info will discuss how slowing Oil & Gas capital spending and drilling activity are affecting domestic crude-oil production, supplier industries and downstream industries like Petroleum Refining and Chemical Processing at the upcoming 2015 Market Outlook & Networking Event, to be held May 6 at the Trump International Hotel & Tower in Chicago, Illinois. The briefing is complimentary, but advance registration is required.

"After the run-up in demand that proppant producers and steel pipe mills experienced in 2010-14, it's not all that surprising that project activity is scaling back," Govreau said. "However, while the short-term outlook has dimmed, the long-term outlook is still positive. In fact, while the number of drilling rigs is down sharply, drillers continue to experiment with hydraulic fracturing techniques. Companies are drilling longer laterals in their wells, and demand for proppant rises with the length of the laterals."

In North Dakota alone, there are at least 850 oil and gas wells waiting to be hydraulically fractured and completed. Low crude-oil prices, coupled with a rule recently implemented by the state to limit gas flaring from oil wells, is causing operators to hold off completion of wells. For more on that regulation, see April 14, 2015, article - Gas-Flaring Rule Reduces North Dakota Crude-Oil Production.

The U.S. industrial sand business is closely connected to the Oil & Gas Industry: Last year, drillers bought about 72% of all industrial sand produced, according to USGS. The states producing the most industrial sand are Wisconsin, Illinois, Texas and Minnesota, the report noted. Industrial sand producers last year had record revenue of about $4.2 billion.

"This whole ripple effect has taken hold and it is going to continue," Richard Shearer, chief executive officer of Superior Silica Sands LLC (Fort Worth, Texas), told the Minneapolis Star Tribune. "There are peak cycles and trough cycles, and we have hit a trough."

The newspaper added that U.S. Silica Holdings (NYSE:SLCA) (Frederick, Maryland), the nation's largest frac sand producer, recently told investment analysts that it expects demand for its sand will fall by 15% this year.

Scott Sustacek, chief executive at industrial sand company Jordan Sands (North Mankato, Minnesota), said he's seen prices decline "in the 25% range" since last year's peak: "It is a softer market, and there is pricing pressure."

The shale revolution of the last few years created a surge of economic activity in industries located upstream and downstream of oil and gas production. For more on that, see May 14, 2014, article - Marcellus Gas Transforms Chemical Processing, Gas Production Industries; June 2, 2014, article - Gas Infrastructure Build-Out Driven by Marcellus Production Surge; and December 10, 2014, article - Marcellus Shale Development Creates Thousands of Skilled Craft Jobs.

As oil and gas companies work through the prospect of a prolonged period of soft prices--at least compared to the peaks of 2014--upstream suppliers to the industry, like industrial sand producers and steel pipe manufacturers, also are scaling back their outlook, at least for the near term.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, five offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.