Today's Fracking Bust Puts 2015 to Shame

Liam Denning
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Today's Fracking Bust Puts 2015 to Shame

(Bloomberg Opinion) -- As President Donald Trump tries to talk up the oil market and his counterparts in Moscow and Riyadh talk past each other, America’s frackers are taking action — by downing tools, mostly.

The number of horizontal rigs, the main type used in shale basins, fell by 60 last week, or almost one-in-10. That’s the steepest weekly drop in almost 16 years, according to data compiled by Baker Hughes Inc., outstripping the downturn that began in mid-2014. Indeed, comparing this crash with the last one reveals some sobering differences.

Shale wells are brought onstream under two broad processes: drilling (self-explanatory) and completion, where the drilled well undergoes hydraulic fracturing, or fracking, to start production. The drilling is done by rigs, and the fracking is done by a collection of equipment such as high-pressure pumps known as “frac spreads” in industry jargon. Here is how the number of horizontal rigs and frac spreads have moved since the start of 2014:

In the last downturn, the number of frac spreads in operation peaked in October 2014, a few months after the price of oil began to fall (the horizontal-rig count peaked in November). It then took 18 months for the counts to bottom out in April 2016, just after oil prices hit their low point and as first reports surfaced of the initial Saudi-Russian concord underlying what would become OPEC+.

What’s striking about the current crash is that frac spreads peaked already in this cycle — more than 18 months ago. In other words, activity is now diving from a lower ledge.

The sheer pace of the current drop in activity is even clearer if you compare just the two worst periods of each cycle, 2015 and 2020-to-date.

It makes sense that the number of frac spreads in operation is dropping even faster than rigs. Drilling accounts for less than a third of the cost of a typical shale well, so if an E&P company wants to save cash, it calls off completions first (there’s also little point bringing new barrels into a market as super-saturated as this one). Bob Brackett at Bernstein Research points out in a recent report that the speed with which frac spreads are taken offline provides a useful indicator of how quickly U.S. oil and gas production will start to decline. The current pace should mean it happens quicker than last time — 10 months from oil prices rolling over in 2014 — he writes.

The other aspect to this concerns employment. As I wrote here, the revival in fracking in 2016 was characterized by doing more with less in terms of productivity per worker. We’re already more than 18 months into a down-cycle in terms of deploying equipment, and the gentle slope has morphed into a cliff. While the oil market retains a curious faith in Trump et al. to engineer a sudden revival, those on the ground can feel it giving way beneath them.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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