As we head into spring, there continue to be signs of ‘green shoots’ of growth emerging across the upstream industry. On the back of sustained oil prices above US$60/bbl, the industry appears to be slowly recovering.
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Perhaps the most obvious success story is the one that never really went away, namely, the US shale industry. By taking advantage of new technologies, established infrastructure, and plentiful DUC wells, US shale operators were able to reduce breakevens and continue producing, even at sub-US$40 prices. Rising prices, supported by OPEC cuts, have seen US production surpass 10 million bpd with estimates showing that the 11 million bpd barrier could be broken this year.
However, this continued growth has raised some concerns at OPEC as the group loses market share to US producers. OPEC Secretary General, Mohammed Barkindo, was quoted as saying that a “common understanding” between OPEC members and US producers was needed.1 Nigeria’s oil minister, Emmanuel Ibe Kachikwu, was more direct, stating that, “We need to begin to look at companies that are very active in these areas and begin to get them to take some responsibilities in terms of stability of oil prices […] Some of the same companies that are working in shale are the same companies working in OPEC [countries].”2 Exactly how this would be achieved is unclear, not least because US companies are prohibited from orchestrating supply restrictions in order to affect prices. The whole ‘theme’ of the downturn has been one of OPEC reacting to pressure from US shale, and it doesn’t look like that’s going to change any time soon.
The other positive news comes from the offshore sector, which was badly hit by the downturn. At their lowest, vessel dayrates fell by as much as 75% and the sector overall has seen several years of successively reduced expenditure. However, despite these challenges, there appears to be some light at the end of the tunnel with increasing levels of activity and investment.
According to analysts at GlobalData, the top 10 upcoming offshore oil projects alone are due to receive US$151.5 billion worth of capital investment over their lifetimes, with US$97 billion being used to bring an additional 1.6 million bpd to global markets by 2025. The largest of these projects is Norway’s Johan Sverdrup, which is expected to produce more than 600 000 bpd by 2024 with an estimated cost of US$25.4 billion.
Higher prices have also brought on an uptick in exploration activity, which in turn is supporting a rise in rig dayrates. Transocean’s CEO, Jeremy Thigpen, commented on the improving market conditions and highlighted how explorers were once again looking in regions characterised by harsh environments: “This upward price momentum has provided some needed confidence among our customers […] Given the improvements that we’ve witnessed in harsh environment utilisation and dayrates, we feel strongly this market is in the early stages of a recovery.”3
Although the damage done, particularly offshore, will take some time to repair, it seems that the worst is over for the upstream industry – 2018 looks set to be a year of gradual recovery.
1. ‘Shale boom, oil price stability dominate Houston energy conference’ – https://uk.reuters.com/article/us-ceraweek-energy/shale-boom-oil-price-stability-dominate-houston-energy-conference-idUKKBN1GH3CU
3. ‘Offshore Oil Recovery Begins in the World’s Harshest Environments’ – https://www.bloomberg.com/news/articles/2018-02-21/offshore-oil-recovery-beginning-in-world-s-harshest-environments