The ramifications of shale

March 1, 2014
Panel probes the explosive growth of oil and gas and dissects the effects on the heavy-duty industry

ABOUT 90 million barrels of oil and gas are produced per day in the world, 20% of that in the United States. And about 50% of what we consume in the United States is imported.

But that picture is rapidly changing, according to Derek Kaufman of the C3Network Inc.

“Today, the US is doing 19 million barrels per day and China is doing nine,” he said. “In four years, the idea is that because of manufacturing and growth in China, they will be consuming more oil than us.

The production of oil is changing. We had a big buildup and came down in production, and now it’s going up at a steeper slope than in the past. The result is that importation is coming down. Last November, the US produced 7.7 million gallons per day of oil and imported 7.6. For the first time since ’95, we produced more than we imported. The Energy Information Administration is projecting that we will move to 8.5 million barrels per day during 2014, so there’s something going on.

“You might wonder whether it can keep going. In other words, what is the strike price of what we’re producing at, and what can OPEC do in the manipulation of prices out there?”

Kaufman said the combination of new technology and new finds in the shale fields—Marcellus, Bakken, Barnett, Eagle Ford, Utica and the others—has changed the picture of how we think about oil and gas. How does this play out in the future?

The impact on trucking has been huge, he said, with 8900 truckloads of material typically going into setting up a well. And there are 1800 wells that are currently producing.

“The wear factor on those trucks is greater,” he said. “This is not all private oil and gas companies. Overall, it’s a heck of an aftermarket opportunity. Whether it’s the exterior, powertrain, brakes, headlamps—all these things are taking huge punishment, and it’s changing the nature of what we do every day.”

To dissect the issue, Kaufman moderated a panel, “How to Profit From the Energy Boom.” The panelists were Randy Arlt, VP of sales and marketing for Polar Corp; Bill Ryan, CEO of Point Spring & Drive Shaft Co; and Dr John Felmy, chief economist at American Petroleum Institute.

Q: We have 800 billion barrels of recoverable oil compared to Saudi Arabia’s 267 billion. The International Energy Agency and Energy Information Administration are forecasting a ramp-up up of shale oil and towards 2018 showing a ramp-up and ramp back down. Are we living a bubble?

Felmy: It is an exciting time. What we are seeing with the shale boom is fundamentally different than what we saw in past technological developments. Developing shale resources is more like the manufacturing process. You know there’s this big block of shale with a big block of resources in there, and depending on prices, you basically move forward. Wells are expensive—$10 million a well—so you’re being judicious. It’s not like a deep-water well, where each could cost $100 million to $300 million, and if you don’t get oil, you can lose it all. The resources are clearly in the ground. As they say, forecasting is difficult, especially if it’s the future.

Q: What is the impact of year-over-year sales you’ve seen?

Arlt: In 2004, we started seeing demand for the equipment to be on the oil fields. We didn’t really understand what was going on. It was in the Barnett around the Dallas area. Sand trailers for fracking were going in. As we went through 2006 and 2007, it started gaining traction. An independent wildcatter took Connell Resources in North Dakota to another level. We were seeing crude oil trailers go to Minnesota. Energy was 10% of our business in 2010, and today it is 40% to 50%. What type of trailers? Trailers hauling sand and crude oil condensate and chemicals that go into the oil field.

Q: How have you had to adapt to the sales and service opportunity?

Ryan: We have locations in the heart of the Marcellus in Utica. We didn’t plan it that way. I’d say five years ago we started to experience activity. It was specifically the fracking. Our sales manager and myself were trying to get our arms around it. The opportunity is unbelievable. We were told this was a 30- to 50-year play, that it was going to be much bigger than the steel industry. That has caused us to reformulate our business model. By that, I mean we still are traditionally parts and service to the heavy-duty business, but we have really focused on those people servicing the industry. It doesn’t necessarily have to be the person at the well site. It’s people putting roads in and bringing water in. We have appointed someone from the business in West Virginia to train our other people and make our sales people at other locations energy consultants. In the last six months, we opened facilities in Kensington, Ohio, purely for the Utica shale, and last year in Troy, Pennsylvania, which is 15 miles south of New York state. We’re now focused on shale because we believe even though it is some boom and bust—that’s what energy is—we’re going to be there when it’s boom.

“My father didn’t start the business, but he was six years into it, and I had the benefit of his experience to hear how our business had evolved over the year. I heard what the war years did for steel. When in I came in the early ’80s, my son had just come into the business. This model is going to take the next generation. We’re just trying to make sure we’re providing a platform and resources so the young guys can come in and take it where it needs to go. The only word of caution is regulations. If politicians get in the road, that’s the only thing that can stop it.”

Q: Where is this thing going next from a field production standpoint?

Felmy: Next it’s likely to be in areas that are either oil- or liquids-rich—butanes, propanes—because those are more valuable. The Marcellus has slowed down some. What’s interesting is that even though gas areas have slowed down, exploratory drilling still continues to be very positive because if you have a lease and don’t explore and drill, you lose the lease. At a minimum you’re going to have to explore. Bakken in North Dakota looks like it will continue in terms of activity and productivity—100 million barrels a year. It’s truly impressive. Other areas have to see how regulations come into play. Central North Carolina—we never dreamed of producing gas there. Or southern Indiana or northern Michigan. Colorado is a case in point where we’re seeing a real good opportunity but have folks who are trying to get implemented these anti-fossil fuel regulations. People are voting on something they know nothing about.

I really think the big movement will be in the Monterrey basin. That’s the biggest share of resources—15 billion barrels of oil estimated right now. That’s twice what we have in Bakken. But there again, will we have good regulations? You have opposition because of Hollywood and other people. Most Californians have no clue that 40% of oil used in California comes from California.

Q: You’ve seen types of equipment going in. What do you see the split being between Class 8 and Class 6-7, and do you see any trends there that change over time?

Arlt: The majority is Class 8. I’d put that at 80%. But when you go to individual drill sites, it’s really a manufacturing process, so you have all types of Class 6-7 trucks in support in work truck applications. In North Dakota, there is a lot of road building, so graders, excavators, bulldozers—all manner of equipment. But Class 8 trucks would be big thing.

Q: Do distributors need a localized service location? What have you done special to service in this area?

Ryan: It does need to be local. You have to provide it when they need it. It’s 24/7. Price isn’t the issue as much as service, because when that equipment goes down—and not just at the well site—we’re talking millions and millions of dollars. So you have to have some sort of local presence. We’re not in the mobile business. We have a good friend from West Virginia, and they do it and that makes a difference. We find that some of the dealers that have gotten very serious about this in our area have gone 24/7 and have mobile service. It’s certainly something we’ll have to consider going forward.

Q: What happens if the pipeline gets approved? How does that change the complexion?

Felmy: In terms of our development, I don’t see as much of a change in total activity. It will largely be swapping out a Canadian group for a Venezuelan and Mexican group. You see Mexican production drop down to below Russia in terms of imports to us. Venezuela is another case. Nicolas Maduro seems to be very clever at doing everything wrong for his economy. Half of Venezuelan oil workers are in Canada and so that will continue to decline. Let’s hope approval happens sooner.

Q: Does it happen this year?

Felmy: You know, for some reason the President doesn’t consult me. But he has a difficult choice. He has two very important groups that are opposed to this issue. The environmentalists want nothing to do with it. They believe that stopping the Keystone Pipeline is going to stop oil sands development. That’s just plain silly. The Canadian oil sands are worth roughly 10 times Canada’s GDP. They’re going to go somewhere. And if you want lower emissions, you should come to the US.

Q: From an extreme cold standpoint, talk about how things are being spec’d. Are they being spec’d with different types of hoses?

Arlt: It’s still developing. I believe next year we’ll probably be in the spec’ing process. People are starting to come to grips with cold weather right now. We’re pretty much putting a standard product out there, with a few tweaks based on a carrier’s desire to have something different added. For the most part, we’re adding standard equipment.

Q: Is there a real pain point where you say this component needs to be changed because of the wear factor?

Arlt: Filtration is extremely important. Anything that’s at the site that could shut them down. If they’re drilling, they just can’t afford anything to go down. So it’s heavy duty, and I think after the cold this year, you will have a better feel.

Ryan: I do think it’s an opportunity for people to keep their ears open: What’s working in these cold temperatures?

Q: Is the purchasing of service, parts, and other materials done from central purchasing centers or on the individual site?

Ryan: It depends upon the customer. Some have the local and regional autonomy and they can do it. Others are sent from Texas. That’s part of the model. You got to find it and figure out how you get the right people.

Q: If we use a $65 barrel and a $100 barrel, is that $100 where OPEC wants to stay, and what’s their ability to do that as these fields open up and regulations allow us to produce even more?

Felmy: $100 is a common number used for them to balance their budgets. OPEC countries have a real challenge: Fast-growing young populations require a lot of revenue to be able to keep the economy going healthy. Venezuela needs very high amounts because of huge social spending. So I have no doubt that’s what they’d like. Now the question is, how are they going to do that? They have 40% of the world market and less ability to be able to drive the price down than they used to because of all these developments, but they can exercise an upward price by producing less. They are a cartel. The problem with cartels, of course, is they don’t work. You always have cheating. They are painfully aware of it. The one leader that has spoken out against shale the most is Vladimir Putin. That’s because of his gas business. That is an important issue for them because of the monopoly they have right now on gas in Europe.

Q: Are you seeing the impact of natural gas on truck power and are you changing your thoughts in the next three to five years on what you’re stocking from a repair standpoint?

Ryan: Yes. It’s the drilling, it‘s the development of the well sites, it’s the infrastructure to move it, and then it has to be used by trucks. We’re seeing fleets in our area taking a look. One of the major fleets we have not only is buying vehicles propelled by natural gas, but they put in a natural gas fueling station. We’re thinking of doing the same thing with our service vehicles and also thinking about getting into the gas delivery business. That’s a few years down the road. There is a lot of government money to help develop that. But that is part of the model for us going forward. We’re lucky at a couple of locations that are right off interstates and easily accessible to provide natural gas. Being a part of the infrastructure is important.

Q: How are you seeing what’s pulling your trailers? Have you seen the impact of natural gas?

Arlt: It’s a wait-and-see thing. Some people have gone in and made a pretty good business out of it. It depends on if a shipper has incentive for them to use natural gas. Folks that I think may move the deal on that will be T Boone Pickens and those folks. The clean-energy folks. I try to watch what they’re doing.

Q: What’s the key shortage of material requirements?

Ryan: I’m not sure there is a key. There are just so many things that are critical. Again, I come back to filtration. Some of the auxiliary-power kind of products we would sell. To me, the filtration is the big one. We have to have that, and they have to be doing preventative maintenance so sites don’t go down. But just about everything to them is the key, so we try to provide those things we specialize in. We meet with them, consult, and then it’s on our shelves.

Arlt: On the tank equipment on the crude oil side, spills are very bad, so anything associated with containing overfill systems—which are electric, and also back them up with manual systems. Those types of mechanical systems are things that are most critical, and finding people to troubleshoot.