A warning: Oil could run short
Drillers need to spend more developing fields around the world, Schlumberger’s chief says
Drillers will have to spend more on developing oil fields around the world by the end of 2017 to prevent a global shortage in coming years, the CEO of Schlumberger said Friday.
That’s why Schlumberger, the world’s biggest oil field services company, is gearing up for a recovery in oil and gas drilling and negotiating higher prices for hydraulic fracturing and directional drilling technology in the U.S., one of the first signs of a new investment cycle in the oil industry.
“The recovery is on its way in all markets,” Schlumberger chairman and CEO Paal Kibsgaard said during a conference call with investors. “The main challenge is going to be to reverse the effects of several years of global (exploration and production) under-investment and then mitigate the impending supply shortage we see unfolding.”
Kibsgaard’s comments followed Schlumberger’s release of fourthquarter earnings that reported a net loss as the international energy services company paid charges related to job cuts, facility closures and other impairments. Schlumberger said it lost $204 million, or 15 cents a share, in the last three months of 2016, compared with a loss of $1 billion, or 81 cents a share, in the same period the year before. Its revenues fell from $7.7 billion to $7.1 billion over the same time.
The world’s No. 2 services company, Halliburton of Houston, is set to report earnings on Monday.
The oil field services sector, which sells a host of drilling services, equipment and supplies to exploration and production companies, took a beating during the two-year oil bust, laying off tens of thousands of workers and losing billions of dollars as oil companies canceled projects, cut production and demanded deep discounts.
Several analysts and groups like the International Energy Agency,
however, have warned the low level of exploration and production investments over the past two years could cause daily oil supplies to run several hundred thousand of barrels short of global demand by the end of the decade. Outside the Persian Gulf, Kibsgaard said, most countries are depleting their reserves without replacing the oil barrels they produce,
“It’s equivalent to borrowing barrels from the future,” Kibsgaard said.
In a report last year, Deloitte said the oil industry has come up about $2 trillion short on the cash it needs to replace the crude it’s pumping today. In December 2015, Houston energy investment bank Tudor, Pickering, Holt & Co. projected the oil industry’s relentless cost-cutting and its retreat from major projects could take 19 million barrels of oil, which would have been produced otherwise, out of daily production over the next few years.
Oil production has fallen in such places as Mexico, China, Nigeria and Brazil, said James West, an analyst at Evercore ISI in New York, but international drilling markets will “bounce off the bottom” this year,
Still, the global recovery will likely be slower than a rebound in U.S. shale plays. The Houston oil field services company Baker Hughes reported Friday that the number of oil and gas rigs in U.S. fields jumped by 35 over last week — the largest rise in five years. U.S. drillers have returned almost 300 rigs to operation since the rig count bottomed in May.
International capital expenditures on exploration and production, however, are set to decline about 4 percent this year, according to an Evercore survey.
“You could be losing several hundred thousand barrels of oil production, and we don’t necessarily think U.S. shale is going to make that up,” West said.
Shale oil production still only represents about 5 percent of global output. Apart from a seasonal slowdown in the first quarter, international oil and gas activity should steadily increase this year as crude prices rise, Kibsgaard said. Crude settled at $52.42 a barrel, up $1.05, on Friday in New York.
“The future supply challenges can only be addressed by a broad increase in global investment,” Kibsgaard said.
Surveys show U.S. drillers expect to increase spending by nearly a third this year, particularly in the lucrative Permian Basin in West Texas. That, Kibsgaard said, should lead to a recovery in prices for service company contracts for drilling and pumping oil.
Schlumberger, he said, has already seen prices pick up for its steerable rotary drilling system designed for unconventional U.S. shale oil fields. It sold out of these systems in the third quarter, and continued to sell out these systems in the fourth quarter. Prices have also risen for hydraulic fracturing equipment used to blast payloads of water, sand and chemicals underground to break apart shale rocks.
Still, he added, “we need significantly more pricing before we get into a sustainable operating environment.”
Keane Group, a Houston oil field services company, also saw prices for hydraulic fracturing services begin to increase modestly at the end of last year and continue in early 2017.
The company launched an initial public offering on Friday and will focus on getting idled equipment back into various U.S. shale fields and possibly acquire additional equipment, James Stewart, CEO of Keane Group, said in an interview.