Document ID: OSHA-2010-0034-4080
Agency: osha
Document Type: Supporting & Related Material
Title: 
Posted Date: 2014-06-10T04:00Z

MEMORANDUM

To:		Robert Burt, Robert Stone, Bob Blicksilver OSHA	 

From:		John Eyraud and Chet Fenton, ERG

Date:		May 30, 2014

Subject:	Utilization rates and charges for small frac jobs 

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ERG reviewed the available data on the duration of hydraulic fracturing
(HF; “frac”) jobs for the smallest firms in the industry. At issue
was whether ERG’s estimate of likely revenue levels and utilization
rates was more or less reflective of actual practices than the rates
suggested by the American Petroleum Industry (API). 

In developing its March 2013 final report, ERG examined 2006 data from
the US Census, County Business Patterns which indicated that the
smallest strata of HF firms would, on average, generate $2.15 million in
revenues per entity (See Table 1, as derived from the ERG report, ERG,
2013). Because the NAICS code for well servicing encompasses a variety
of well site activities, these data are of uncertain value in
characterizing a single type of well servicing, namely hydraulic
fracturing (HF). Based on discussions with project consultants, ERG
judged that average frac job for these small firms generates $25,000 in
revenues per well. As is discussed further below, ERG selected $25,000
as a reasonable estimate of job revenues, from a revenue range for small
frac jobs of $5,000 to $50,000. ERG also judged, at the time, that a
$25,000 frac job is likely a relatively brief job, involving one day on
site and fracturing of a single oil or gas production zone. Using that
figure, firms earning $2.15 million in revenues would complete only 86
jobs per year. If it is assumed that the jobs are completed in 1 day (an
assumption discussed further below), this suggests that small frac
fleets are in use only 23.5 percent of the year ($2.15 million divided
by $25,000 and divided by 365 days of the year). 

Industry publications have noted utilization rates for the HF industry
at very high levels in recent years, with some estimates over 80 percent
(see, for example, PacWest Consulting Partners, 2012). The utilization
rate is used in the calculations to help estimate the likely revenue
levels for small fracking firms, using the assumptions about average
revenues per small frac job. No utilization data are available
specifically for the smallest operators in the industry. ERG judged that
it was likely that utilization rates were higher than implied by the
calculations above (i.e., that more than 86 small frac jobs per small
frac firm were performed in a year) and, therefore, that average
revenues were likely much higher than the Census figures suggested. 

API argued that the average job requires three days and, thus, that the
estimate of 86 jobs were a likely limit to the activities of these firms
during the year. API accepted the estimate of $25,000 per job for the
smallest strata of fracking firms. If it is true that the frac jobs take
longer, then the firms would complete fewer jobs per year, which
translates to lower revenues per year. 

API noted that our use of utilization rates was incorrect in that ERG
interpreted the utilization rate to represent the percentage of days on
which a well stage is being fracked (and on which revenues from fracking
are being generated). More accurately, the utilization rate includes the
days in which the frac fleet is traveling, setting up, or dismantling
equipment at the well site, as well as the days on which fracking is
performed. ERG should have explicitly taken into account the possibility
of additional travel time in the utilization rates. For larger HF
companies, this criticism is of little relevance because the revenue
estimates are not tied to the utilization estimates. Nevertheless, API
appears to overcompensate for this by generating too large of an
estimate of the time needed for these very small frac jobs. 

For these smallest firms, incorporating lengthier travel times into the
calculations suggests that a somewhat lower utilization rate should be
used in estimating revenues. ERG, however, judges that travel times to
jobs would not be very large for most very small companies, and are not
likely to be as lengthy as suggested by API (which included a day of
set-up and travel before and a day of travel after each well is fracked
for a total of three days per job). As is discussed below, ERG
identified regions with shallow oil and gas reservoirs and, thus,
shallow wells. In these regions, fracking companies sometimes complete
jobs entirely in one day (including set-up, fracking, and dismantling of
equipment) suggesting that ERG’s estimate of 1 day per job was more
reasonable than API’s 3-days-per-job estimate.  

The fact that a frac firm is on site for only 1 day does not necessarily
mean that there is minimal travel between sites. But the industry
economics dictate that most travel cannot be too lengthy relative to the
length of the job, and therefore suggest that lengthy travel for small
frac jobs would be unusual. Also, in many cases, even in areas with
shallow wells, frac crews might stay at the well for several days, such
as if they are fracking more than one production zones while on site.
These types of projects, with several days at the well, also reduce the
share of travel time in the overall fleet utilization. 

ERG originally calculated different HF firm revenue estimates using 40,
60 and 80 percent utilization rates, and then calculated revenue and
profit impacts using the middle value, that is, a 60 percent utilization
rate (See Table 2). Tables 3 and 4 present the original and revised
estimates of revenue and profit impacts. Using the original estimates
(including an estimate that firms generated revenues on 60 percent of
the days of the year), ERG generated an average revenue for the smallest
fracking firms of $5.5 million per year. If a lower utilization rate is
employed (average per small frac job revenues are generated on 40
percent of the days of the year), then these smallest fracking firms
earn $3.6 million per year. With the change, profit impacts increase
from 4.5 percent to 6.8 percent. Revenue impacts increase from 0.5
percent to 0.7 percent. 

Table   SEQ Table \* ARABIC \s 1  1 . Summary of Total NAICS
Establishments and of Selected Size Categories—As Extracted from HF
Report

Employee Size Category	Entities (a)	Establish-ments (a)	Employment (a)
Receipts ($000) (b)	Revenue per Entity (b)	Revenue per Establishment (b)

Total NAICS	6,845	8,008	155,404	$34,524,044	$5,043,688	$4,311,194

10-19	840	876	11,300	$1,808,128	$2,152,533	$2,064,073

20-99	840	968	30,917	$4,993,872	$5,945,086	$5,158,959

100-499	149	318	21,536	$4,771,591	$32,024,101	$15,005,003

500+	83	855	78,673	$20,520,367	$247,233,339	$24,000,429

Total for Selected Employment Size Categories	1,912	3,017	142,426
$32,093,959

(a) Census Bureau, 2006. 

(b) Estimates based on 2002 receipts and payroll data from Census
Bureau, Statistics of U.S. Businesses, 2002 and payroll data from Census
Bureau, Statistics of U.S. Businesses, 2006. Receipts are not reported
for 2006, but were estimated holding the ratio of receipts to payroll
remained unchanged between 2002 and 2006.

Table   SEQ Table \* ARABIC \s 1  2 . Derivation of Adjusted HF Per
Establishment Revenue Estimates—As Extracted from HF Report

Employee Size Category	Estimated Number of Entities in Hydraulic
Fracturing	Estimated No. of Establishments per Entity	Total
Establish-ments	Census-Based Revenue Per Establishment Estimate (a)
Estimated HF Revenue Per Stage (b)	Estimated Establishment Revenues at
Different Utilization Rates (Percent)(c)

40%	60%	80%

10-19	100	1	100	 $      2,064,073 	$25,000 	$3,650,000 	$5,475,000 
$7,300,000 

20-99	50	1.2	60	 $      5,158,959 	$50,000 	$7,300,000 	$10,950,000 
$14,600,000 

100-499	46	4	184	 $    15,005,003 	$100,000 	$14,600,000 	$21,900,000 
$29,200,000 

500+	4	25	100	 $    24,000,429 	$136,335 	$19,904,910 	$29,857,365 
$39,809,820 

Total	200	 	444	 	 	 	 	 

(a) Derived in   REF _Ref347305932 \h  \* MERGEFORMAT  Table 1  above.

(b) Estimated by ERG.

(c) Utilization is defined as performance of 1 stage per day for the
specified percentage of days in the years. As noted in the discussion,
many HF jobs will accomplish more than one stage in a day. 

Data on Average Length of Frac Jobs

ERG had previously contacted consultants and industry personnel about
the activities of the smallest strata of firms in the industry. The
comments received included:

According to an industry contact, the smallest jobs might generate from
$4,500 to $50,000 in revenues. For some of these jobs, the frac job
might be done for testing purposes, or because of problems with the
downhole operations. Some of these jobs might be use only water (i.e.,
no sand) as it is not necessary to stimulate the well with a sand frac
(King, 2013). Stripper well jobs are among the smallest jobs.  

According to a fracturing firm, the smallest jobs involve one stage of
fracking and generate $10,000 to $50,000 in revenues (name withheld). 

A Michigan state official judged that some frac jobs had been done in a
day, although the number of shallow wells now being drilled in Michigan
has diminished to very few. The Michigan oil and gas formations are
quite shallow and might use 40,000 to 100,000 gallons of water as
opposed to the multimillion gallon fracturing jobs on deeper well. When
drilling occurs, it is common for frac jobs to last two days, with a
stage drilled each day (Henderson, 2012 and 2014). 



Table   SEQ Table \* ARABIC \s 1  3 . Profit Impacts for Hydraulic
Fracturing (at 3% Discount Rate)-Original Estimate As Extracted from HF
Report

NAICS	Industry	Total Costs	Total Affected Establishments 	Cost per
Affected Establish-ment	Revenues per Establish-ment [a] 	Profit Rate [b]
Profits per Estab	Cost as % of rev-enues	Cost as % of profits

All Establishments	 	 	 	 	 	 	 	 	 

213112	Support Activities for Oil and Gas Operations	$26,392,500	444
$59,443	$18,513,145	10.31%	$1,908,705	0.3%	3.1%

SBA Entities	 	 	 	 	 	 	 	 	 

213112	Support Activities for Oil and Gas Operations	$2,564,504	100
$25,645	$5,475,000	10.31%	$564,473	0.5%	4.5%

Entities with <20 Employees 

213112	Support Activities for Oil and Gas Operations	$2,564,504	100
$25,645	$5,475,000	10.31%	$564,473	0.5%	4.5%

[a] Revenues inflated from 2006 to 2009 dollars based on the GDP
implicit price deflator.

[b] IRS, 2002 to 2006

Note: In calculating this table, ERG had assumed that firms were
fracking on 60 percent of all days during the year. 

Table   SEQ Table \* ARABIC  4 . Profit Impacts for Hydraulic Fracturing
(at 3% Discount Rate)-Adjusted Estimate with Lower Utilization Rate for
the Smallest HF Firms

NAICS

Industry

Total Costs

Total Affected Establish-ments 

Cost per Affected Establish-ment

Revenues per Establish-ment [a] 

Profit Rate [b]

Profits per Establish-ment

Cost as % of revenues

Cost as % of profits

SBA Entities

 

 

 

 

 

213112

Support Activities for Oil and Gas Operations

$2,564,504

100

$25,645

$3,650,000

10.31%

$376,315

0.70%

6.81%

Entities with <20 Employees

213112

Support Activities for Oil and Gas Operations

$2,564,504

100

$25,645

$3,650,000

10.31%

$376,315

0.70%

6.81%

[a] Revenues inflated from 2006 to 2009 dollars based on the GDP
implicit price deflator.

[b] IRS, 2002 to 2006

Note: For this revised estimate, ERG assumed that firms were fracking on
40 percent of the days of the year. 

Additional contacts after the hearings generated the following
information:

Oklahoma has numerous shallow wells and many are fracked entirely in a
day. The individual could not estimate the overall percentage of such
wells among the total (Baker, 2014).

An executive in the Texas Railroad Commission judged that some frac jobs
were completed in a day. Such jobs would most likely be located in the
Permian basin or in West Texas where there are numerous shallow,
vertical wells (Savage, 2014). One-day jobs would not be expected in the
Eagle Ford or Barnett oil fields, where the reserves are located at a
greater depth. 

These data suggest that a share of frac jobs are indeed completed within
a day, suggesting that the frac fleet involved might be redeployed to
another location on the next day, although travel distances might be
sufficient to prevent that. The overall average duration of jobs might
be more than one day, but it also appears to be less than 3 days a large
percentage of the time for this smallest stratum of firms. As noted
above, ERG also calculated the revenue levels using a 40 percent
utilization rate for very small fracking firms, which equates to about
1.725 days per job.  

References

Baker, Tim. 2014. Telephone conversation between Tim Baker, Field
Operations Supervisor, Oklahoma Oil and Gas Commission and John Eyraud
of ERG. May 13. 

Henderson, Rick. 2014. Telephone conversation between Rick Henderson,
Field Supervisor, Michigan Division of Oil and Gas and Minerals, and
John Eyraud of ERG, May 8. 

King, George. 2013. Telephone conversation between George King,
Distinguished Engineering Advisor, Apache Corporation and John Eyraud
and Anita Singh, ERG. January 24, and February 11, 2013.

PacWest Consulting Partners. 2012. PacWest Consulting Partners. Press
Release for 3rd quarter Pumping IQ report. 

< HYPERLINK
"http://pacwestcp.com/2012/09/us-hydraulic-fracturing-market-will-be-ove
rsupplied-by-nearly-3-6-million-horsepower-by-the-end-of-2012-says-repor
t-from-pacwest-consulting-partners/"
http://pacwestcp.com/2012/09/us-hydraulic-fracturing-market-will-be-over
supplied-by-nearly-3-6-million-horsepower-by-the-end-of-2012-says-report
-from-pacwest-consulting-partners/ 

Savage, Leslie. 2014. Chief Geologist, Oil & Gas Division, Railroad
Commission of Texas,  conversation between John Eyraud of ERG and Leslie
Savitch, Texas Railroad Commission. May 6, 2014. 

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