OPEC Production Cut to Drive OFS Spending in Shale
The Organization of Petroleum Exporting Countries’ (OPEC) decision to cut production by 1.2 million barrels per day of oil will result in as much as $15 billion in increased spending to flow into the non-OPEC shale market in 2017.
Non-OPEC shale well services firms will be best positioned for this growth, with an estimated $10 billion of additional spending, according to recent analysis by Rystad Energy. Assuming 10,000 wells are drilled and completed in 2017 in shale plays, drilling contractors stand to benefit from an additional $2.5 billion in spending.
However, Rystad expects offshore suppliers to continue to struggle in 2017, with the overall offshore market to be reduced by $19 billion in 2017 versus 2016. Engineering, procurement, construction and installation and subsea purchases will face the biggest impact, with respective spending reductions of over $12 billion and $4 billion.
This year has been an even tougher year than previous for most service companies, with onshore North American service companies experiencing revenue reductions from 30 to 50 percent, said Audun Martinsen, VP of oilfield service analysis at Rystad, in a Dec. 7 press statement. Just like 2016, Rystad anticipates 2017 will bring more market consolidation and more collaboration between service companies and operators, along with more consolidation activity to occur within the oilfield services sector versus exploration and production, Martinsen told Rigzone. This will occur more within the North America onshore services and offshore service companies.
“But OPEC production cuts will turn the needle on the FID [final investment decision] for many projects in shale and offshore, which will eventually generate more transparency on future activity and revenue,” said Audun Martinsen, VP of oilfield service analysis at Rystad, in a Dec. 7 press statement.
Martinsen told Rigzone that OPEC’s cut will likely strengthen the business case for Statoil ASA’s Johan Castberg project, Exxon Mobil Corp.’s Liza discovery, ENI S.p.A’s Nene Marine Phase project and Hurricane Energy plc’s Lancaster project. Last week, BP plc and its partners approved the second phase of the Mad Dog project in the Gulf.
OPEC’s decision will give North American shale the opportunity to prove it can fill the role as the world’s swing producer, according to a Dec. 7 analyst note from Evercore ISI Research. The effectiveness of North America shale in this role will hinge partly on the extent to which efficiency gains prove cyclical versus structural, and the extent to which rising service costs consume growing exploration and production capital expenditures.
“The stage is unequivocally set for substantial activity increases in North America in 2017 while most other energy producing regions scale back operations,” Evercore analysts stated. As a result of these increases, the first half of 2017 will become a critical juncture for the oilfield services industry “as the impact of labor constraints and the state of idled equipment will soon be evident.”
Evercore analysts said the time had come for oilfield service companies to honor their promises and respond with discipline to incremental activity requests, pushing pricing above “unsustainable” levels and reverting margins to profitability.
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