The Perils of ESP Equipment Leasing

Meaghan Gipson

Many unconventional well producers have turned to leasing Electric Submersible Pumps (ESPs) to curtail upfront capital spending and have moved artificial lift spend into operating budgets.  The concept seems logical: ESP equipment spend can be deferred and timed with production revenue and should be less expensive than purchasing ESP equipment considering the well’s decline rate over time.  However, the reality is proving quite different.

The hidden downside to leasing ESP equipment is that most of the rental fleet is comprised of used equipment with limited remaining useful life.  The result of putting used equipment in a challenging unconventional well is a shorter runtime due to more frequent equipment failure and frequent well interventions.  Many producers are discovering the free cash flow destruction present in this model:

  • Unbudgeted and unvalidated backend failed equipment charges
  • Increased workover rig expense
  • Increased well kill expense
  • Deferred production losses from downtime

The solution to each negative outcome from the lease model is to focus on uninterrupted run time.  New equipment of a high quality, applied correctly for your well, assembled and installed flawlessly will put your well on track to generate more free cash flow sooner through longer run times.  How is this possible?  Consider the impact of doubling your ESP run time from six months to one year in a population of twenty wells that produce an average 500 bopd:

Leasing sounds attractive on the surface; however, the example above shows its potentially negative impact on free cash flow generation.  In the current environment of capital discipline and internally funded growth, everything needs to be evaluated.

If production teams come together with management and procurement to quantify total cost of ownership and the benefits of uninterrupted run time, E&P companies will find that long-term positive cash flow generation is often better with an upfront purchase of new ESP equipment.

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