Back in February, there was hope for most of the global E&P industry to have moderate growth during 2019, including the U.S. Yes, Canada was in some trouble, but everything else looked “okay.” That vision proved unachievable, thanks to the late spring/early summer swoon that oil futures took, with WTI price staying in the $50s/bbl, unable to crack $60/bbl and stay there. Accordingly, we have seen downward revisions to some operators’ spending, and their activity has declined. Yet, we’ve also found areas of optimism sprinkled around the globe.
First, the good news. On the positive side, as we put our revised forecast together, we found two categories of E&P work that are doing fairly well—onshore conventional and offshore, in general. The first category holds true in the Middle East, where NOCs are not obligated to indulge the investment community. So, we see Iraq’s rig count up 35%, Abu Dhabi up slightly, and Saudi Arabia and Oman holding about even. Overall, rigs are up 3.5% in the Middle East, and our forecast calls for a 6.5% drilling gain. Other onshore places with noticeable upticks are Australia, Peru and Colombia.
The situation offshore is even more positive. Outside North America, offshore rigs are up 15.1% from August 2018. In the North Sea, rigs are running 74% higher, and the number of active units reached 40 for the first time since May 2015. Spending is up in that region, as new technologies extend producing field lives, and new regional operators acquire assets from legacy majors.
Other areas with improving offshore activity include West Africa and the U.S. Gulf of Mexico. In the latter, active rigs are 53% higher than a year ago, totaling 26 units. Some of that is due to operators opting for what they perceive to be better, longer-term rates-of-return.
The problems. An obvious problem is U.S. shale plays, where activity has hit a plateau and begun slipping. Wall Street’s pursuit of shale operators to make better rates-of-return is causing some companies to reduce drilling. Other factors in the minor retreat are steel tariffs; weaker global demand, related partially to the U.S.-China trade dispute; and downward pressure from contracting U.S. manufacturing. Thus, we forecast second-half drilling declines in most shale-oriented places.
Meanwhile, Canada has been in trouble since mid-2018, with no solution in sight. Canada’s biggest problem is the federal government politicizing everything about the industry. Perhaps if a new administration is elected in October, the politicization will stop, new pipelines can get built, and more oil and gas can flow.
Service sector solvency. We’ve touched on this subject before, but it bears repeating—the service companies are in dire need of making a reasonable profit. Stock prices for the larger service firms are down to about half of what they were a year ago. We certainly appreciate that operators are under pressure from investors to show greater profit while also demonstrating ever-more efficiency gains. Yet one thing that this editor has heard repeatedly from service companies at Offshore Europe, as well as in Houston, is that much of the current pricing “is not sustainable.”
So, how to allow more profit for the service companies without eroding the operators’ standing with the investment community? The answer may not be easy, but it needs to be found.
Comments from Senator Manchin. We are pleased to host a guest commentary from U.S. Senator Joe Manchin (D – W. Va.) on our Executive Viewpoint page (see page 25). Tying in with our report on the Marcellus and Utica shales, Sen. Manchin discusses how the time has come to build an Appalachian Storage Hub for various natural gas liquids. By keeping these resources at home, this hub would attract petrochemical manufacturers to the region, allowing U.S. firms to process and export these more valuable products. The proposal already seems to have the support of U.S. Secretary of Energy Rick Perry. WO
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