Compressors, generators, and pumps–the rugged tools of the trenches–crank out the oilfield’s toughest, most long-running duties. These units are an industry unto themselves, and their dealers always have a finger on the pulse of an ever-changing industry.
While the drilling rig and the pump jack are the symbols of the oilfield, there is a world of smaller machinery that keeps the fluids and the currents flowing, though this smaller, workaday hardware labors out of the limelight, so to speak. But motorized devices such as compressors, generators, and pumps do a multitude of jobs. How that sector fares tells us a lot about the industry in general.
PBOG Magazine visited with several industry suppliers to learn what trends are affecting this sector of the oilfield hardware market, and what we learned from them sheds a light, or a sidelight at least, on some recent directions in the industry on the whole.
Compression Factor
Jim Brown is sales manager for Compressor Designs Inc., a company with its headquarters in Midland and its shop facility in Odessa. He acknowledged that Compressor Designs is “very busy right now,” just like most service companies in the Permian Basin.
“Our shop is full, our rental fleet [compressors, that is] is highly utilized, and we’ve got the same issues as everyone else: finding manpower and those sorts of things. But business is good.”
Brown described Compressor Designs, which was launched in 2001, as a “small horsepower” company, meaning that they specialize in the smaller compressor units—electric-power only, generally between 10 and 50 horsepower. The electric units are more portable, obviously, than bigger units that often run on fuels. Most compressor transactions for them are rentals, but they also sell the units as well.
Compressor designs, which employs about 10 people, is not a manufacturer. Brown thinks of them as more of a “packager.” They buy compressors, motors, and other components on the wholesale market and from these they construct their units.
“We’re really more on the oil side of the business, helping producers handle the associated gas produced with the oil,” Brown said. “Producers are seeing a lot of fluctuations in gas sales line pressures because the pipelines are full, the plants are full, and there’s not enough big compression out there on the gathering systems. So a lot of the producers are fighting high line pressure. In order to sell their gas, they’re having to get into higher line pressures. Some of these older wells won’t buck that pressure, so therefore we can come in and help.”
Besides that, companies like Compressor Designs are becoming more involved in vapor recovery applications. Due to changes in environmental regulatory matters, vapor recovery equipment is in strong demand, along with all the service that goes with it.
Brown feels that his company has found a good niche for itself. Many of the larger compression companies—Compressor Systems, Exterran, Valerus, and Natural Gas Services Group—have kept their concentration in larger, heavier-duty units—mostly 100 hp and up, including many gas engine-driven units, and that has left a nice market open to Compressor Designs.
Will the market take any new turns?
Brown doesn’t expect any big changes. “If the Cline Shale is as big as they say it is, and if everybody keeps drilling and the price of oil stays up, then I see our business continuing to grow just like everybody else’s. People are building buildings and I don’t see any signs that we’re due for a bust. It looks like for the foreseeable future it’s going to stay pretty steady.”
Accel-erated Activity
Accel Compression is another company that, like Compressor Designs, caters more to the smaller-compressor market. Accel does deal in some units in the 200 hp range, but the bulk of its business is in the 10 to 60 hp range. Roger Becker, president of Odessa-based Accel Compression, told PBOG that, in the current marketplace, his company is being impacted in two ways.
“One, with the horizontal drilling in the Bone Springs, the Wolfcamp, and the Avalon-type shales, they’re getting a real gassy, light oil,” Becker said. “There’s just a lot of associated gas with this oil, and the gatherers don’t have enough infrastructure to take it all away, so pipeline pressures are increasing. We’re getting calls from several operators needing compressors to reduce pressure on their production equipment and subsequent backpressure on their wells. Traditionally, we were on gas wells out there and when that market went away with the low pricing in ‘08 or ‘09, that business has become slow. But with the recent stuff here, we’ve picked things up.
“The second market area experiencing huge demand had been slowly gathering but it’s really getting into high gear now. It’s the EPA’s new Quad-0 [0000] regulations. It had been on the horizon for a few years, but now it’s got a deadline of February 2014. Operators will no longer be able to just vent the vapors off the stock tanks. You’ve got to either flare it or capture it with VRU’s [Vapor Recovery Units] and sell it. So what we call our ‘vapor recovery market’ is really hot right now. It’s being driven by new regulations, yes. But also, there’s a lot more gas than what most operators realized was being vented, so our VRU’s are a new revenue stream, which helps offset some of the expense of this regulation. But the main thing is that it’s regulation-driven, and thus we are trying to help our customers to get into compliance. Along with the VRU’s, we are also providing services to upgrade their tank batteries to be ‘VRU ready’ and also provide monitoring and inspection services to make sure they remain in compliance.”
Like Compressor Design, Accel Compression is not a manufacturer.
“We’re more of an assembler or fabricator. We buy the compressors and assemble them—hook them up with motors and valves and controls and all that,” Becker said.
Generational Outlook
Generators are always in demand, but perhaps never more than today, where the Permian Basin is concerned.
One of the key providers of oilfield generators is LarMar Rents, a Midland-based company that also has operations in Oklahoma. “Ninety-five percent of our business is proving temporary power to oilfield production equipment,” said Chris Tucker, general manager at LarMar Rents, who said activity has been running high.
“We’ve had a boom for the last three years,” said Tucker, who noted that LarMar Rents’ concentration lies on the production side of the business. And in saying that, he is saying that LarMar’s generators are powering pumps in the oilfield. “Centrifugal pumps, electrical submersible pumps, surface pumps, and rod pumps.”
LarMar sells Caterpillar generators to the oil and gas industry, “but most of our rentals come on the production side, and that’s where we’ve seen the big growth,” Tucker said. “If you were to go back eight years or so, when we started our rental program, most of our day-to-day business was de-watering gas wells. Back then, a long-term rental was, say, 30 days. We pulled water off of gas wells. And then we moved on and just kind of ‘leapfrogged’ well to well. When the price of gas went down and the price of oil went up, we started doing what’s called a ‘well test.’ So a company would drill a well, and before they would spend the money to bring power [utility power] into that well, 483 volt-based power, they would want to do a well test. It was unproven territory, so they’d want to see if the well was going to be a producing well. So they would rent a generator for a 30-day well test. A 30-day well test usually ended up being a 60-day well test. And then, if the well produced, they would decide to bring in power and that would usually take another 2-3 months. So, from what used to be a ‘long-term’ rental of a month, now we’re looking at three to four months as ‘long term.’ And we would just go from well to well to well and leapfrog generators and keep a steady in and out. Well, now, with so much activity, the power companies are having a harder time building infrastructure fast enough to meet the high demand, and the existing infrastructure is limited. Not only can they not build the power grid fast enough, if they build the grid to the well, our power grid is still so substandard that they can’t meet the demand—even if they’ve got the infrastructure in place. There’s so much [demand] on our power grid that they can’t turn it on. So now long-term rentals are one year, two years, three years. We have generators rented right now that have run 24 hours a day, seven days a week and have only [been] stopped to do a one-hour service twice a month, for three years. So you’ve got that long-term continual rental without a lot of ups and downs. That’s how the rental business with power generation has changed.”
And is all this change due to the boom?
“Yes. It’s because, number one, the demand for oil, of course. Another reason, I believe is that, with oil up over $100/bbl, oil companies can really afford to produce it. In the past, when the oil price was down, we rented to oil companies that could still turn a profit when it was $40/bbl. At that low price it was very difficult for oil companies to expand into new territory. But now at $100, they [and everyone else] can take a bigger risk and they can recoup the high costs to drill a well. That’s the thing—everything’s more expensive, of course. Drilling is more expensive. So what happens is, they have to start producing these wells immediately to pay back their [higher] drilling cost and they can’t wait for power because they’ve already contracted to the drilling companies. So it’s really, truly quadrupled our business over the last three years. I’m not an expert on the oil and gas industry, but it is my opinion that this is the sole reason for the increased business in regards to power generation.”
Tucker said LarMar Rents has been in the business for a long time. “We have many experts from the power generation industry and the oil and gas industry and they know enough to “know how to properly size for all applications in oil and gas business to give customers the most consistent production of uninterrupted power supply.”
And how do they size them?
Big. “We offer 45 kilowatts to 2,000 kilowatt.”
Tucker says—and not without some degree of surprise at what he’s saying—that rental rates in the power generation field have stayed stable. “The rates have stayed pretty much the same for the last 7-8 years, probably,” he says. “I really do not believe that we’ve had rate increases within the last 8 years. But they’re expensive [generators] to begin with. Diesel fuel is expensive and we also deal in natural gas generators. That has become a very popular item [the natural gas units] because customers are using the head gas right off the well. People want to say that it’s ‘free gas.’ Right now—since it’s so low-priced and we have such an abundance of natural gas—it’s still close to $4/MCF. But they aren’t able to sell much of it due to surplus. The natural gas is kind of a playing field that everybody has been in. We’ve gone through this a couple of times. What has happened in the past is that natural gas goes up, and diesel goes back down. But many oil and gas companies are making a commitment to the use of natural gas power generation as an alternative to diesel driven generators at this time.”
Regardless, Tucker believes LarMar is well fixed to meet demand. “We’ve got a good balance,” he said. “We’ve got a good plan, moving forward, for this industry. We are diversified between natural gas, rental generators, natural gas generators for sale, packaging, emissions, and then the portable diesel generators, which are quickly and easily put to use.”
Pump It Up
The companies cited thus far told PBOG that they did not do a big business in pumps. Compressors or generators were their mainstays. But Abilene-based E.C. Tool Company, which we turn to now, is an exception. “Our bread and butter is drilling pumps and pump expendables,” said James Berry, general manager at E.C. Tool.
With so much activity going on with compressors and generators, it would seem that pumps would be a thriving business, too.
The reality is… not exactly. At least not for one of the eastern Permian’s main suppliers.
“It’s pretty soft,” Berry said. “There’s some activity as far as equipment rig-ups and equipment purchases are concerned. Predominantly, what I’m seeing right now, as far as drilling equipment purchases and rig-ups, is in the newer style ‘flex’—or ‘apex,’ if you will—style rigs. The AC-driven automated rigs. The older conventional mechanical equipment market has been pretty soft over the last six months or so.”
So is there not so much of a demand for pumps on these latest-generation rigs?
“There is demand for pumps,” Berry said. “But, just throwing ball park numbers out there, with these newer rigs you’re talking about a $20-25 million rig. That, versus a rig that—and it depends on who rigs it up and how nice it is—runs about $1.5 to $5 million. So the number of rigs being rigged up in that [newer] style are fewer. And also the number of people that actually have the means to put that kind of rig out are also fewer.”
The numbers don’t lie, Berry said, as he observed that the active rig count today is down about 100 rigs from this time a year ago.
But another reason why drillers are calling for fewer pumps is because the industry is moving toward larger and larger pumps.
“We have a smaller-rig niche that we’ve been servicing over a number of years,” Berry said. “We service some big duplexes, which are really not common anymore, but we do have that niche that we are taking care of. And then there are the smaller triplexes. But a lot of the big directional companies are wanting the larger 1,300 and 1,600 horsepower triplex pumps, and I’m even hearing of some 2,200 horsepower triplex pumps out there.”
As for those pump “expendables,” that end of the market has remained steady, or at least steadier than the pump business itself. Berry defined expendables as liners, pistons, valves, seats, gaskets, and other such components. “As well as even your hard metal parts that are made to wear out.”
With parts, it’s sales only—rentals don’t come into play. The rental business for E.C. Tool lies in the pumps and big equipment, but those deals have come fewer and farther between. Berry said he tried to put some rental packages together “when things were real busy, like in ‘05-’08,” but every time he got a package finished, someone would come along and need one right then, and he would end up selling it. “Right or wrong, I had a hard time turning down a lump sum for a daily rental rate,” he said.
But if there’s a silver lining, it is that this slowdown has not been terribly long. “It’s been about the last 12 to 16 months,” Berry said. “There are a lot of dynamics impacting it.”
How long will it last? Only time will tell. But one thing is for sure… each new year seems to bring some kind of new ripple to this ever-changing industry.