- We expect current oilfield truck driver shortages to persist and even intensify. This should increasingly act as a constraint on the growth of US shale production, a primary concern regarding the future global supply-demand balance for crude oil.
- Demand for oilfield truck drivers has spiked following (1) growth in the US rig count, (2) greater sand usage per well, (3) higher water cuts in the Permian Basin, (4) an apparent shortage of oil takeaway capacity in the Permian, and (5) new electronic logging device (ELD) rules leading to greater compliance to driver Hours of Service regulations.
- Supply for drivers has been limited by an aging driver workforce and recruiting headwinds including CDL requirements, driver health issues, and drug testing.
- Further driver shortages should result in enhanced labor cost pressures and less-than-expected growth from US shale oil, both of which we believe are supportive for crude prices.
In 1995, Volkswagen launched its well-known and highly-successful tagline “Drivers Wanted,” helping to boost its sales by 18% the following year. Comically, the phrase also had the unintended effect of frequently sending confused job seekers to VW dealerships after misinterpreting the promotional signage. The oil sector might take note, as the current labor tightness in the industry, particularly for truck drivers, would seem to make its adoption of the slogan now quite sensible.
In our December 8 white paper “Extrapolation: When Excel Loses Touch with Oilfield Realities,” we listed ten key constraints which we believe should serve as a governor to the growth of US shale production. Of these constraints, we believe labor is one of the most obvious, particularly given the well-broadcasted declining US unemployment rate. At approximately 4%, US unemployment has fallen to a 17-year low, according to the US Bureau of Labor Statistics. However, within oilfield regions like the Permian Basin, labor tightness has become even more dire. We highlight the Midland unemployment rate today at roughly 2%, essentially representing full employment.
Labor tightness in the oilfield extends throughout nearly all positions, but particularly for highly-skilled workers like wireline engineers and diesel mechanics. Similarly, truck drivers have become increasingly scarce. However, unlike engineers, this scarcity relates less to the experience levels and skills required. (Although driving a large rig on narrow, remote dirt roads congested with many other trucks likely has its challenges.) Rather, the intensifying shortage of drivers is the result of several key issues relating to supply, demand, and new regulations.
Rising Demand for Truck Drivers
The demand for truck drivers serving the energy sector has naturally risen as the US has approximately doubled its total oil production over the past decade to currently 10 million barrels/day (mmbl/d). Moreover, expectations are that US production will continue to rise, possibly reaching as high as 14-15 mmbl/d over the next decade. Still, it’s not simply the number of wells being drilled that has driven the increased oil-related trucking needs, but also several other key factors.
- Greater sand intensity per well. In recent years, US oil producers have achieved dramatic gains in production efficiency (as measured by oil output per well or drilling rig). Key to this increased efficiency has been a major rise in the amount of proppant (or fracking sand) used per foot of horizontal length. Specifically, according to Spears and Associates, sand intensity has risen from 869 lbs/foot in 2014 to an average of 1,409 lbs/foot in 2017, with levels above 2,000 lbs/foot being applied at many wells. Also, a large increase in the lateral length of horizontal wells has boosted sand usage. Benefiting from new technology, current horizontal lengths are frequently in the 10,000 to 15,000-foot range, more than double the average earlier this decade. The combination of these factors, in addition to a rising rig count, has driven proppant usage in all US basins from a recent trough of 8 million tons (mt) in Q1 2016 to over 14mt in 4Q 2017.
A rather obvious consequence of increased sand usage is a greater number of trucks required to haul the sand to the well, either directly from an in-basin mine or from a rail terminal. As shown in the example by Solaris in Exhibit 2, an average well that consumes 10,000 tons of sand during the fracking period of a well (many wells use substantially more) equates to roughly 400 truckloads of sand to be delivered to the wellsite. Assuming 10-15 days for the completion stage of an average well, this implies 27 – 40 sand truckloads per day to each individual well (not considering proppant storage systems, where sand delivery may be spread out over more days). For the Permian Basin, where we estimate sand consumption totals more than 4mt/month currently, this amounts to 5,000 to 6,000 trucking round trips per day in the region just for sand delivery.
- Increased Water Cuts. Often when people think about the issue of water at a wellsite, they mainly focus on the water required to frack the well. Granted, we believe shortages of such “clean” water is also an important oil supply constraint. However, even more voluminous than the amount of required frack water is the flowback water that is generated from a well’s production. This water must be disposed of via trucking or pipes to a regulated saltwater disposal well or be recycled and used as frack water. From our conversations with various industry participants, the latter is a process that is still too capital intensive and expensive versus disposal for most oil producers to employ.
The amount of flowback water differs considerably by basin. Importantly, the Permian Basin, which is expected to provide the bulk of growth in US shale production, has one of the highest water cuts, reaching as much as 90% over the life of the well in some cases. Moreover, within the Permian, water cuts are proving to be the highest in the less-developed, yet rapidly-growing Delaware Basin in West Texas and Southeast New Mexico. For example, in its 4Q 2017 conference call, Carrizo Oil & Gas highlighted how its oil output had been impacted by higher-than-expected water cuts in the Delaware Basin.
Again, the clear implication of a higher water cut and more Permian wells is a greater number of trucks (and truck drivers) being required to dispose of the water, even considering growth in other options such as recycling, pipes, or layflat hoses. With the normal truck capable of holding 120 barrels of water, we estimate an average well requires 30-60 truckloads per day during initial production, with wells in the Delaware Basin likely to be on the high-end or exceeding this range. Given these trends, it is not surprising that drivers for water disposal trucks are in high demand.
- An expected shortage of takeaway capacity in the Permian. In recent weeks, investors have increasingly become concerned about the amount of takeaway capacity in the key Permian Basin given the expected production growth in the region. This has led to a large widening in the spread between the Midland WTI price and the WTI price at the Cushing OK hub (i.e., the Midland-Cushing differential). Logically, a shortage of pipes to transport additional volumes of produced hydrocarbons (crude oil, natural gas, and natural gas liquids) would result in output from wells being stranded in-basin, resulting in a local supply glut.
Fortunately for the industry, help is on the way as several midstream companies have announced plans for additional pipelines that should ease the takeaway constraint in 2H 2019. However, until that time, other measures of oil transport will need to be utilized, including rail and trucking, both of which are capacity constrained themselves. (See related comment below from Phillips 66 management on its recent 1Q18 conference call.) For trucking, should this option for oil transport be available, the estimated cost for producers to deliver oil to Gulf Coast hubs can range from $10-$13/barrel, an amount that has risen substantially and is much more expensive than contracted pipeline takeaway. Still, given the current driver shortages in the Permian, we would not be surprised if the cost to transport via trucking continued to increase.
- New Electronic Logging Device (ELD) requirement. Following broad industry deregulation in the 1980s, the barriers to entry in the trucking business fell substantially. This led to an extremely fragmented industry, with more than 500,000 trucking companies operating in the US today up from approximately 20,000 four decades ago. Since the vast majority of these companies are mom & pop operators serving a wide range of end markets, it’s no surprise that federal regulations regarding Hours of Service (HOS) rules have often not been strictly followed. This is especially since truckers historically have had to only manually record their supposed time behind the wheel.
However, on in December 18, 2017, a new regulation by the Federal Motor Safety Administration (FMCSA) went into effect, requiring that all commercial trucks maintain ELDs in the truck cabin to monitor driver hours. (Following a short period where only fines were assessed, a more severe 10-hour out-of-service order associated with non-compliance began on April 1, 2018.) The new requirement was intended to significantly reduce cheating on HOS requirements, in turn enhancing highway safety. In many cases, the resulting truck utilization is expected to fall from 16+ hours/day to a compliant 11 hours per day on the road. FMCSA’s HOS regulations also include a weekly cap of 70 hours after which a driver must take a 24-hour break.
Our conversations with various trucking sources have confirmed that the ELD mandate has already had a major impact by forcing some small operators out of the market and by boosting the need for additional drivers. We have even heard that some companies have experienced drivers walking off the job, as a reduced workday has lowered the paycheck potential for many truckers.
A Shrinking Pool of Truck Drivers
Aging Driver Workforce. Unfortunately, the trucking industry seems ill prepared to meet the increasing need for drivers, particularly in the oil sector. A key problem is the aging demographic of the US supply pool of truck drivers. Exhibit 6 shows the results from a 2014 analysis of truck driver ages performed by the American Transportation Research Institute (ATRI). The charts clearly illustrate a shift to an older trucking workforce, where more than 29% of trucking employees fell into the 45-54 age group, the highest figure of any age category. This compares to less than 16% for the 25-34 age category. Similarly, the American Trucking Association (ATA) states the average truck driver age in 2016 was 49 years old, significantly higher than the average of 42 years old for the overall US workforce. Obviously, the industry has not done an adequate job at recruiting Millennials and is at risk of a contracting labor supply as Baby Boomers enter retirement.
A shortage of drivers is not a new issue for the trucking industry. According to a 1998 report published in the Monthly Labor Review, deregulation led 586,000 new trucking employees to enter the industry between 1980 and 1994. Still, with the large entrance of new trucking companies, driver shortages were a major issue, as the resulting increased competition and low trucking margins pressured driver wages and made recruitment difficult.
In addition to the persistent need for more drivers within a fragmented industry, there are additional headwinds that the trucking industry is facing that has made trucker recruitment difficult, particularly regarding younger drivers. Those include the following:
- Commercial Drivers License (CDL) requirements – Unfortunately, the industry misses out in recruiting drivers after high school graduation, as the federal requirement is that interstate CDL holders be 21 years or older. As such, many potential young drivers are lost to other occupations, additional schooling, or military service. Additionally, for insurance requirements, the minimum age is bumped to 25 years for certain segments of the trucking industry, like hazmat or long-haul trucking. Finally, the time and financial requirements to attain a CDL is a detraction for some individuals, especially in a tight overall labor market. A CDL generally requires several weeks of training and testing, as well as tuition at a CDL school that can run as high as $7k.
- Health Considerations – In today’s more health-conscious society, it’s quite obvious to most job seekers that a position as a truck driver doesn’t promote one’s overall physical wellbeing. As to be expected with a stationary job, studies have shown that truck drivers on average have higher levels of obesity and lower life expectancies than most other occupations. The ATRI has proposed several initiatives to address this issue, including encouraging exercise facilities and healthy food choices at truck stops and travel plazas. Still, it seems health concerns will continue to negatively impact the attractiveness of the job for many potential drivers.
- Driver competition from other trucking sectors – The growth in e-commerce (i.e., the Amazon effect) has greatly increased the need for trucking in other sectors. Separately, the growth of Uber and Lyft has created competition for drivers in the non-CDL arena. As such, companies that are recruiting drivers for the oil sector, many of which are centered in remote locations, face increased competition from potentially more attractive driver positions in other segments and geographies.
- Oilfield trucking considered dangerous – Similar to the point above, concerns on safety may deter potential trucking job applicants from choosing a job in the oil sector. This may not be as relevant for drivers hauling sand or water for disposal. However, the trucking of crude, natural gas liquids, or any flammable product naturally involves a higher level of risk than transporting other products.
- Drug testing – Sadly, we have heard from many companies that the ability to pass a drug test has become more difficult for many job applicants. This issue disqualifies applicants for many positions, not just truck drivers. (Although, successfully passing a drug test seems particularly important to operating a truck or any large piece of mobile equipment.) Also, the trend to follicle drug testing, rather than urine testing, has enhanced the detection of illegal substances in an applicant’s body and has led to higher levels of drug test failures reported to companies.
Result: Driver Shortages and Rising Truck Driver Wages
The higher demand for oilfield truck drivers, combined with a tight labor market, an aging driver workforce and industry recruiting challenges, leads us to the clear conclusion that a greater level of driver shortages is likely to be felt by the industry. This is consistent with a recent ATA forecast, which predicts the US will need 900,000 new drivers over the next decade to match demand, and that the driver shortage will more than double over the next decade from an estimated 60,000 in 2018.
The topic of increased driver shortages was the number one concern in the 2017 ATRI’s annual survey of Top Industry Issues. As shown in Exhibit 9, this was the first time driver shortages ranked as the top industry issue since 2006. Also, the second most pressing issue according to the survey was the ELD mandate, which again has major implications for driver shortages.
As a result of driver shortages, we expect the wages trucking companies will be required to pay drivers will continue to increase. According to a recent APA Driver Compensation Study across all sectors, the average private fleet driver earns $86k/year, up from $73k in 2013, a 18% increase. Still, for oilfield drivers, compensation levels seem to be inflating at a faster rate, particularly as activity in the key oil basins has accelerated in recent years. As illustrated below, a job search for a truck driver position in Midland, TX on Indeed.com yielded a vast number of postings, with several positions offering salaries of over $100k per year with substantial signing or performance bonuses. Conclusion
We believe the impact of driver shortages has two positive impacts on oil prices.
- Applying upward cost pressure for oil producers. In most cases, we expect the resulting higher wage costs from truck driver shortages to ultimately be passed on to oil producers, partially offsetting recent improvements in well efficiencies and effectively raising their marginal cost of production. This in turn should increase the oil price required for producers to bring additional barrels to market. It should be noted that with the recent trend among US oil producers of enhanced focus on capital returns and growing within their cash flows, cost pressures will likely be given even greater consideration when E&Ps draft their plans for future production.
- Constraining the growth of US oil production. In our view, driver shortages should act as a meaningful constraint to the growth of US shale oil production, a major factor to the global supply-demand balance for crude oil. As mentioned previously, the production growth from shale deposits has driven US oil output to roughly 10 mmbl/d, approximately double the rate a decade ago. Moreover, the combination of reduced shale breakeven prices, dramatic reserve growth via multiple pay zones with shale formations, and the emergence of the US as a major oil exporter has led many energy prognosticators to expect further rapid US production growth in upcoming years at a rate ranging from 1.0-1.5 mml/d.
We agree the expansion in US shale production is likely to continue and, most importantly, is needed in today’s environment of strong global demand growth and either falling or stagnating output among several key oil producing countries. However, we believe real-world oilfield constraints, like shortages of truck drivers, could limit that growth to a more conservative range of 600k to 900k barrels/day of growth. The expected result would be an extension of the ongoing tightening of global crude supplies, applying intermediate-term support for oil prices.