First Oil

Welcome to our February issue and its annual winter/first-of-year global drilling forecast. As you can see, we’re calling for U.S. wells drilled to rise 8.2%, to 20,655, while footage will rise 8.7%, to 289.4 MMft of hole. Outside the U.S., we’re predicting a 9.0% gain to 44,568 wells. And we also can tell you that crude and condensate production mounted a fairly impressive recovery last year, increasing 4.4%, to 80.849 MMbpd, its highest level since 2019’s figure of 82.4 MMbpd. All in all, it’s a fairly healthy picture for this year. You can find many more details that go into these numbers in the assortment of forecast articles in this issue. 

The lingering U.S. malaise. Yet, despite the relative optimism of our forecast, we perceive some uneasiness lingering under the surface in the U.S. upstream market. Let me say again, as we have stated in recent in-person presentations of this forecast to varied audiences, that we believe that most of the growth we forecast for the U.S. this year will occur in the back half of 2022. We think that 2023 will perform as the reverse of 2022—be sluggish in the first half and then demonstrate growth in the second half. 

Accordingly, we are not totally surprised by weakness in the Baker Hughes rig count, which lost 12 units on Feb. 3, gained back two rigs on Feb. 10, lost one unit on Feb. 17, and lost another seven rigs on Feb. 24. Together, these movements represent a net loss of 18 rigs during February. But we are not fazed—yet. This editor believes that many of the factors that slowed down activity in second-half 2022 are still at play. These include personnel shortages; high, inflationary prices for various oil field equipment, goods and services; supply chain issues as relates to availability and timeliness; governmental meddling on the regulatory front; and a number of operators still practicing serious fiscal discipline, 

Nonetheless, it seemed like a good idea to check our assumptions on operator behavior against some real documentation of attitudes. So, yours truly went back to the most recent oil field survey done by the Federal Reserve Bank of Dallas, particularly the “Comments” section. Indeed, our own thinking seems to be right in line with operators, the only difference being that they are even more emphatic. 

Operator comments. “Labor is an issue that is affecting our firm,” diagnosed one operator. “The government can remove all regulations and timetables, and the amount of increase in activity would not be affected by more than 10%. Automation cannot drill wells, move rigs and build locations.” And to that, we at World Oil would say “amen.” 

Meanwhile, another operator complained, “Raising capital is a real problem that is exacerbated by the administration constantly yacking about putting the oil and gas industry out of business. That is not helpful. It has been obvious for a long time now that their plan is to deprive us of capital sources and regulate us out of business. Like it or not, oil and gas is here to stay for a very long time. Our request is simple: Get out of our way and we will deliver cheap energy.” And we at World Oil agree wholeheartedly. 

Echoing our own concerns about personnel, a third operator lamented, “Employment continues to be a significant obstacle to growth. We cannot hire the talent we need. Our competitors' employment packages are so good at attracting talent that offers have evolved to a level I have never seen in the 40 years I've been in the business.” We at World Oil sympathize and agree with these observations. 

One operator, obviously from New Mexico, described a very frustrating operational environment: “Supply is very limited, and service companies are taking a long time to come and do the work. There is a lack of qualified service workers. New Mexico state agencies are not user-friendly with the rules and regulations, but they sure do enjoy the pot-load of money the oil and gas industry has given to the general budget. It is very unfortunate that the state government has been very hostile to the oil and gas industry, but at the same time, they want oil and gas revenues that fund the budget by one-third. There is no industry that gives as much as the oil and gas industry. I have asked them to get another industry to take our place. There is none.” We at World Oil understand this operator’s frustration and can only say, there is nothing, absolutely nothing, that government does well these days. 

Speaking of regulation, one final set of comments from an operator sums up the situation succinctly: “The following issues are affecting our business. First, new emission standards. Second, rising oilfield costs, both lease operating expense and capital expenditures. Third, the threat of extra federal taxation.” To which we at World Oil say, yes, yes and yes! 

The impact of embargoing Russian oil. In addition to their fine quarterly survey of the oil field, the good folks at the Dallas Federal Reserve just recently put out an excellent piece entitled, “Trade diversion has helped ease the impact of the embargo on Russian oil.” Since this issue of World Oil eats around this topic in various forecast articles, we naturally looked at their analysis with great interest. 

As Dallas Fed authors Lutz Kilian and Kunal Patel note at the beginning of their article, “Many observers expected trade sanctions against Russia to substantially raise the price of oil.” However, the problem with that thinking is that tanker traffic data now suggest that global oil markets have been more resilient than anticipated. As has become evident of late, a good portion of the Russian oil destined for export to the West is finding its way to Asia. 

“Much has been made of the effect of Russia’s invasion of Ukraine on the price of oil,” they continue. However, they rightly point out that the price of oil was already drifting upward, well before the invasion in late February 2022. This movement was driven by growing demand for oil, as the global economy recovered from the Covid downturn. This trend continued into mid-2022. 

Regarding the effects of the oil embargo that started in December 2022, the authors state that as recently as 2021, Russia exported 4.7 MMbpd of crude oil to the rest of the world, along with 2.8 MMbpd of petroleum products. Some of the crude oil exports to Europe and Asia, they say, relied on oil pipelines, which were operating near full capacity before the invasion. 

Accordingly, Kilian and Patel say that since the pipeline exports of about 0.8 MMbpd to Europe remained stable in 2022, and pipeline exports to Asia could not be increased, much of the adjustment of export flows relied on oil tankers loading Russian oil at Black Sea and Baltic Sea ports, as well as ports in the Arctic and East Asia. 

And the fact is that total Russian oil tanker exports during 2022 increased substantially despite reduced deliveries to the West. So, Russia was not only able to divert crude oil originally destined for Europe and its allies to countries not participating in the embargo, but the Putin regime was able to raise its overall oil tanker export volume by as much as 40%! 

As Kilian and Patel note, “The main beneficiaries of this shift were India, China and Turkey. For example, India’s imports of Russian oil in 2021 were not material, but the country took full advantage of heavily discounted imports of Russian crude in 2022…”  

In total, say the authors, Russia—far from reducing the supply of its crude to the rest of the world after January 2022—increased that supply and did so at prices lower than those available elsewhere. “This, if anything, provided a global stimulus while helping finance the Russian war effort. It also helps explain why the West Texas Intermediate price did not remain elevated, relative to trend…”   

What happened in Europe. Accordingly, say Kilian and Patel, oil markets might have been tighter in 2022, had it not been for some European countries continuing to import Russian crude oil and—in some cases—even increasing their imports. “Italy, in particular, took the opportunity to stock up on discounted Russian oil, while many other European countries, with varying degrees of success, gradually reduced their imports.” However, they also point out that by January 2023, these flows declined to a trickle, with limited exports continuing to reach Italy, the Netherlands and Spain, despite the embargo. Pipeline exports of Russian oil to Europe also dropped substantially. 

Meanwhile, the authors say that preliminary data indicate total Russian exports by oil tanker in January 2023 recovered to nearly 4.0 MMbpd, about 1.0 MMbpd higher than in December 2022, when bad weather delayed shipments. “This suggests that Russia has been able to divert most of the oil formerly shipped to Europe by pipeline, coupled with only modest oil production cuts.”  

The outlook for 2023. Killian and Patel say that tanker traffic data indicate that “the impact of the crude oil embargo on oil prices and on the global economy is likely to be fairly benign in 2023, absent a strong surge in demand. The fact that the $60 price cap on Russian crude—imposed in December 2022 as part of the trade sanction regime—was too high to be binding undoubtedly helped reduce the frictions in the tanker market, as did India’s decision to proceed without Western insurance and Russia’s move to expand its own tanker fleet.” 

IN THIS ISSUE 

Special focus: 2023 global forecast. For the 97th consecutive year, the World Oil staff has assembled its annual review and forecast of global E&P activity. The Forecast section features Evercore’s capital spending outlook, the regulatory/political picture in Washington from Contributing Editor Roger Bezdek, and the U.S. drilling forecast, compiled by our editorial team. The U.S. report includes considerable analysis. Additional reports cover Canadian and international E&P. 

Drilling technology.  We are blessed to present several fine feature articles on this topic. Several Weatherford authors explain that to extract all possible hydrocarbons from complex reservoirs, advanced RSS and LWD technologies improve overall drilling efficiencies and lower construction costs over the life of the well. Meanwhile, Halliburton authors describe how autonomous drilling has not progressed as far as previously thought. As an industry, there needs to be a change to a full-system approach to progress further. Finally, authors from Eneva and Web Nordeste Ltda. explain implementation of an innovative wellhead system for slimhole, monobore gas wells, onshore Brazil.   

Regional report: Brazil. In this popular annual feature, Contributing Editor Mike Slaton says that optimism prevails, as investments and improvements point to production growth. He adds that a third-quarter production improvement, attributed to regulatory and economic changes, plus technical advances, tracks a return to pre-Covid output levels and supports an optimistic forecast of continued Brazilian growth. State firm Petrobras is also optimistic; its 2022-2026 CAPEX plan is expected to add 20 Bboe to the company’s production over the next decade. 

About the Authors

Kurt Abraham

World Oil

Kurt Abraham kurt.abraham@worldoil.com