The Fuse

Shale and Deepwater to Lead Oil Industry Spending

by Nick Cunningham | January 17, 2017

If prices stabilize in the $50s or higher, 2017 will be a relatively rosy year for the industry, with a heavy concentration of spending in U.S. shale and expensive deepwater.

After several years of seeing painful contractions, the oil industry is set to boost spending on exploration and drilling in 2017. Rigs counts are rising, drilling is picking up pace, and employment in the U.S. oil sector is rebounding from five-year lows. In its latest Short-Term Energy Outlook, the EIA revised its forecast for U.S. oil production upward for this year, saying that it is expecting growth of 110,000 barrels per day (b/d) compared to last month’s projection of an 80,000 b/d decline in output. Rising oil prices are buoying market sentiment, and although there are plenty of pitfalls for crude, if prices stabilize in the $50s or higher, 2017 will be a relatively rosy year for the industry, with a heavy concentration of spending in U.S. shale and expensive deepwater.

Spending, drilling set to rise

In 2017, the oil industry could move forward with final investment decisions on 20 large conventional oil projects, defined as fields with 50 million barrels or more by Wood Mackenzie. That would be more than double the 2016 total of just 9 projects that received approval.

“The cycle we’ve just been through, we believe we’re coming out of that cycle,” Malcolm Dickson, a principal analyst at Wood Mackenzie, told Bloomberg. Higher capital expenditures come after the industry posted its worst year in discoveries in seven decades in 2016. The 3.7 billion barrels of new oil reserves discovered last year was the lowest total since the early 1950s, according to WoodMac.

spending

Shale to see quick turnaround

The U.S. shale industry was hit as hard as anywhere during the more than two-year downturn, with production falling from more than 9.6 million barrels per day (mbd) in April 2015 to about 8.5 mbd in the summer of 2016. But with shale drilling being “short-cycle,” requiring just a few million dollars and a few weeks of drilling per well, output from U.S. shale is expected to rebound quickly with higher oil prices.

Shale E&Ps have tweaked their drilling techniques–drilling longer laterals and using more fracking fluids and proppants per well. That has allowed the industry to produce more with less.

On top of that, the U.S. shale industry has consolidated and made other crucial adjustments during the downturn. Shale E&Ps have tweaked their drilling techniques–drilling longer laterals and using more fracking fluids and proppants per well. That has allowed the industry to produce more with less. In October, the latest month for which revised data is available, the U.S. produced 8.8 mbd of oil with fewer than 500 rigs. By way of comparison, more than two years earlier, in July 2014, the U.S. also produced 8.8 mbd, but back then, the country required more than 1,500 rigs to do the job, a reflection of massive efficiency gains.

The U.S. shale patch should see growing interest from the oil industry, with spending set to soar. WoodMac estimates the U.S. will see spending rise by 23 percent to $61 billion, with much of that concentrated in the Permian Basin in West Texas, the main driver of shale output this year.

Deepwater revival

In a surprising development, deepwater drilling could be making a comeback, despite its high costs. One-third of the 20 large projects that WoodMac believes will move forward in 2017 will be located in deepwater. Offshore drilling projects often costs billions of dollars and require several years of development. As a result, in an era of low and volatile oil prices, such large-scale projects have been deemed too risky by much of the industry. Only 440 offshore oil wells were drilled in 2016, 40 percent fewer than the 740 drilled in 2014.

Nevertheless, some of the largest companies have succeeded in bringing down the costs for offshore drilling. WoodMac says that the breakeven price for offshore drilling in the Gulf of Mexico has declined to just $40 per barrel, putting a number of projects in profitable territory with oil prices safely trading above $50 per barrel, at least for the time being. Drilling times for the typical offshore well have been reduced from 75 days to 55 days, WoodMac analysts say.

Deepwater drilling could be making a comeback, despite its high costs. One-third of the 20 large projects that WoodMac believes will move forward in 2017 will be located in deepwater.

Against this backdrop, offshore drilling could rebound in 2017 after a dearth of new FIDs in recent years. Rystad Energy has identified a list of high-profile drilling projects that could move forward around the world, ranging from Norway’s northernmost oil well, Korpfjell, in the Barents Sea, to a BP-led natural gas drilling project off Australia’s northwestern coast. In addition, ExxonMobil is working on a major discovery off the coast of Guyana–on January 12 Exxon announced another discovery in Guyana, which will make the prospect a particular area of focus for the oil major going forward. WoodMac singled out a few other large offshore projects that could receive an FID in 2017. These include Royal Dutch Shell’s Kaikias project in the Gulf of Mexico and Petrobras’ Sepia project in Brazil.

Still a supply gap?

A number of analysts have warned that the lengthy period of spending reductions would cause tighter conditions in the oil market in the years ahead, leaving the world dangerously short of oil supply toward the end of the decade.

Even though the oil industry may be on the mend, it will just barely avoid a three-year streak of falling capital expenditures.

Even though the oil industry may be on the mend, it will just barely avoid a three-year streak of falling capital expenditures. Global upstream spending could rise by 3 percent in 2017 to $450 billion. Of course, the rise in spending and increased drilling is a sign that the industry is stabilizing, and more exploration will lead to more discoveries and additional supply. However, while spending is set to increase this year, upstream investment is still 40 percent below the record $774 billion set back in 2014. Moreover, although project approvals for large projects of at least 50 million barrels of reserves are set to double in 2017, the estimated 20 approvals are still half of the annual average of 40 projects seen between 2007 and 2014, according to WoodMac. In other words, drilling activity is still a shadow of its former self.

“This year, if there are no major investments coming, we may well see in a few years from now significant supply-demand gap with serious implications on the market.”

Oslo-based Rystad Energy expects the oil majors to increase output this year by 398,000 b/d, and another 670,000 b/d in 2018. But that additional supply will come from projects planned years ago, and the figure also includes natural gas. If oil majors do not greenlight new drilling, they could struggle to grow production once they work through the backlog of projects.

All this could mean a supply shortage is still possible, even with the uptick in spending. On January 15, the IEA’s Fatih Birol reiterated his warning about tightness in the coming years even as U.S. shale is set to climb in 2017. “This year, if there are no major investments coming, we may well see in a few years from now significant supply-demand gap with serious implications on the market,” he told Reuters.

 

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