After a flurry of development activity in Q1 2017, the US Lower 48 onshore sector is beginning to feel the squeeze of cost inflation. Although this development was widely anticipated, forecasts vary significantly depending on the source as well as project location.
Our base case assumption of 15% cost inflation draws from an uptick in confidence around oil price, increased capital budgets for operators, and negative margins for oilfield services (OFS) companies resulting in deeply reduced pricing. But not all inflation will be distributed evenly.
Pressure pumping: squeezed for resources
With an estimated 37% increase in tight oil completions this year and a pressure pumping market at 90% capacity, this segment of the services sector remains the most exposed. Prices have been up 20% to 40%, and a lack of maintenance during the downturn will require significant capital investment before re-entering the market — in some cases, as much as US$7 million to reactivate a frac spread and up to three months for a fleet to re-enter the market.
After a flood of Q1 demand, a handful of private pumpers have looked to the public markets to fund the reactivation of fleets. However, if demand persists throughout Q2, new capacity could be quickly absorbed in the Lower 48, sustaining the 20% cost inflation we project for this segment.