Oilfield Services

Oilfield services is the sector of the petroleum industry made up of the contractors and suppliers that perform work on wells for oil and gas producers. Its markets include drilling rigs and fluids, casing and cement, fracturing pumps, proppant, and completion fluids and flowback,¹ along with the hauling of oilfield waste and the plugging of wells that no longer produce.²³ Demand for these services rises and falls with drilling activity, which in turn follows oil and natural gas prices.¹

History

Service and supply businesses followed the early Texas oil discoveries. After the Spindletop gusher of 1901, the Gulf Coast around Houston, Beaumont and Port Arthur filled with the yards, shops and factories of the companies that supplied the new fields.⁴ In North Texas, Wichita Falls became the regional service and supply center, and companies later opened offices in Fort Worth as production moved south.⁴

In Texas the yearly average rig count rose from 770 in 1979 to 1,318 in 1981, when rising costs for supplies and services pushed up the cost of exploration.⁴ After the collapse that followed, one third of oil and gas employment in the state was lost between 1982 and 1994.⁴ In the Barnett Shale of North Central Texas, Mitchell Energy and Development Corporation spent the 1980s and 1990s experimenting with ways of hydraulically fracturing the rock and by 2000 had developed a technique that produced commercial volumes of shale gas.⁵ Horizontal drilling and hydraulic fracturing account for most of the growth in United States natural gas production since 2005.⁵

Segments

The work can be described by the stage of a well’s life at which it is done. A 2016 report prepared for the federal Energy Information Administration, covering typical onshore wells that are drilled horizontally and fractured in multiple stages, grouped the main drilling and completion costs into five categories.¹

• Drilling. Rigs and drilling fluids made up 15 percent of total drilling and completion cost; the cost depends on market conditions and on the time needed to reach total depth.¹
• Casing and cementing. Casing and cement accounted for 11 percent, reflecting the casing design required by local well conditions and the cost of materials.¹
• Fracturing equipment. Frac pumps and related equipment, including the horsepower required for a given treatment, were the largest single category at 24 percent.¹
• Proppant. Proppant, which ranges from natural sand to manufactured and resin coated material, accounted for 14 percent.¹
• Completion fluids and flowback. Sourcing and disposing of water and other fluids used in fracturing made up 12 percent.¹

The remaining 23 percent fell into other categories.¹ The same study found that total capital cost per well in the regions examined ranged from $4.9 million to $8.3 million, including completion costs that generally fell between $2.9 million and $5.6 million, with wide variation between individual wells.¹ The regions included the Midland and Delaware plays of the Permian Basin.¹

Other work falls outside those categories. Exploration and production generate large volumes of waste, chiefly spent drilling muds, cuttings and produced water, and in Texas any person who hauls such waste for hire off a lease must hold a waste hauler permit from the Railroad Commission of Texas, renewed annually.² At the end of a well’s life, most wells that are no longer productive are plugged by the responsible operators, and the Commission administers a state program, begun in 1984, that contracts to plug abandoned wells; it publishes a list of approved cementers for that work.³

Economics and cycles

Service companies are exposed to the capital spending decisions of their customers. The EIA study noted that oil and gas prices affect the market for drilling and completion services through their effect on drilling activity.¹ Costs climbed through the expansion years that ended in 2012, when service capacity was being added quickly; by 2015 average drilling and completion costs in the five onshore areas studied were 25 to 30 percent below their 2012 peak.¹ The study attributed part of that decline to an oversupply of rigs and service providers, and part to more efficient rigs and greater completion crew capacity.¹

Essays on this site take up practical consequences of that exposure: the financing of equipment in what equipment lenders want, the collection of invoices from operators in the essay on receivables, and the coverage of field risk in an essay on insurance.

Regulation

In Texas the Oil and Gas Division of the Railroad Commission regulates exploration, production and transportation of oil and natural gas. Its statutory role is to prevent waste, protect the correlative rights of interest owners, prevent pollution and provide for safety, which it carries out through permitting and reporting requirements, field inspections and programs to remediate abandoned wells and sites.⁶

Ownership and capital

One form of outside capital used by companies in the sector is described in the entry on growth equity. Rosser Newton’s firm provides growth capital to oil, gas and oilfield services companies, and his essays on the sector include one on selling to a larger competitor; an overview of that work is on the work page.

References

1. U.S. Energy Information Administration, Trends in U.S. Oil and Natural Gas Upstream Costs ↩ ↩² ↩³ ↩⁴ ↩⁵ ↩⁶ ↩⁷ ↩⁸ ↩⁹ ↩¹⁰ ↩¹¹ ↩¹² ↩¹³ ↩¹⁴

2. Railroad Commission of Texas, Waste Haulers ↩ ↩²

3. Railroad Commission of Texas, State Managed Well Plugging ↩ ↩²

4. Texas State Historical Association, Handbook of Texas, Oil and Gas Industry ↩ ↩² ↩³ ↩⁴

5. U.S. Energy Information Administration, Where our natural gas comes from ↩ ↩²

6. Railroad Commission of Texas, Oil and Gas Division ↩