Historically, the US has tended to be ahead of other locations in the oil and gas cycle. What has happened historically in the US has provided an indication of what will happen in the North Sea in the next six to nine months, with most basins tending to follow global trends.
Whether this still holds true in the new age of US shale is however the big question on my mind as, like many others in the industry and professional services, I return from the annual pilgrimage to Houston for OTC.
A recent Wood Mackenzie report on the latest public pronouncements of 109 E&P companies showed average capex investment in 2017 is forecast to increase 16% – but more than half of this investment increase relates to onshore US activity, which is still less than 10% of global production.
The latest forecasts of US production for the remainder of the year show a considerable ramp up in output, at rates quicker than previously expected. While good news for US onshore service providers, as “Permian-mania” builds, this has the potential to constrain or deflate the oil price, which could dampen the improving investment sentiment and recovery in other basins.
The more positive prognosis is that while the growth of the far shorter shale investment timeframe may have altered to some degree, the historical global “boom and bust” cycle of the industry, a further school of thought has emerged that the growth of shale alone will not be enough to satisfy increased global demand for oil and gas. And hence an increase in offshore investment will be needed, and that the historical profile of a fairly uniform global investment cycle will continue.
While first quarter results for companies in 2017 showed limited, if any actual, improvement on 2016, the mood music here has appeared to change – as witnessed by the recent Scottish Chambers survey – with cautious optimism slowly, but surely, gaining momentum. Many companies are now edging out of survival mode and focusing on strategic plans once more.
The relative stability in oil prices over the past six months, and consistent forecasts of the forward price at marginally above current prices, have been conducive to the considerable M+A activity in well-publicised E&P transactions. A recent Business Outlook report by Oil & Gas UK showed that around $4 billion has already been invested through M&A activity in the UK market this year, and we would expect further E&P transactions as the year progresses, with new investors entering the basin and the sector and others rebalancing their asset portfolios, though the latest price wobble is clearly unhelpful.
It will take some time before increased spend from the new owners of assets, in pursuit of their development plans, trickles down into the services sector, from which new operators may expect different or more clever solutions from the traditional operating model. Nonetheless, such sizable E&P transactions have sent a clear, positive message in terms of confidence. Private equity and hedge funds have oil and gas on their radar again and, with more money around generally, optimism and activity barometers are rising.
In terms of opex outlook, there are somewhat conflicting messages between industry bodies, operators and the anecdotes from the service sector. The optimists in the service sector expect a bounce in general activity, through catch-up activity on deferred maintenance and other spend, which although discretionary in the short term, cannot be postponed indefinitely. The operators, not surprisingly, tend to take a different view on the quantum of catch-up spend required.
Returning to the theme on the impact of US shale – at OTC, while generally the mood was positive, there was quite a distinguishable difference in optimism between onshore US focused businesses, where rig count is growing weekly, and those servicing offshore international markets such as the North Sea, which have inherently longer investment cycles, and where meaningful recovery still seems some way out.
Alan Kennedy is the UK head of oilfield services at KPMG.