US shale to face short-term headwinds

The headwinds facing the US shale oil and gas industry are expected to intensify in the short term, but the outlook for next year is robust.

Onshore operators are grappling with three primary challenges — a shortage of pipeline capacity to move crude and associated natural gas from the Permian basin in west Texas and New Mexico to the coast, the rising cost of services such as pressure pumping, and a shortage of workers. Companies have a range of responses, service firm Halliburton chief executive Jeff Miller says, such as reallocating capital elsewhere, slowing down activity and building up inventories of drilled but uncompleted (DUC) wells.

These challenges have temporarily eased the urgency that companies feel to step up drilling, putting some pressure on pricing for equipment and services as demand moderates, Miller says.

Rival firm Schlumberger's chief executive Paal Kibsgaard says a consensus that the Permian can provide 1.5mn b/d of annual output growth for the foreseeable future "is starting to be called into question".

The pipeline constraints should be resolved by the end of 2019, but the challenges they have posed may end up dampening output growth, wellhead prices and investment in the coming year, Kibsgaard says. "The hydraulic fracturing market has already softened significantly more than we expected, in spite of the overall rig count holding up relatively well," he says.

Kibsgaard flags up longer-term uncertainty facing the sector over reservoir and well performance. One way to overcome these challenges is to drill longer lateral wells and pump more sand and water. But "the use of these remedies seems to be coming to an end, both from a technical and commercial standpoint," Kibsgaard says. Unit well performance in Texas' Eagle Ford formation — normalized for lateral length and pounds of sand pumped — has fallen as the percentage of secondary wells drilled rises. A similar performance decline is evident in the Permian's Wolfcamp area. "Permian growth potential could be lower than expected," Kibsgaard says.

Fracks and spend Upstream spending in North America is nevertheless forecast to rise by 15pc this year, UK bank Barclays says in its mid-year global spending survey of over 200 companies, up from a 9pc forecast based on producers' initial budgets in April. "Many cited a higher oil price environment, increased drilling and completion efficiencies and higher steel costs due to tariffs," Barclays says.

North American producers will drive worldwide upstream spending, which is on pace to grow by 8pc this year, in line with the bank's December survey.

The bank puts US operators in three categories — those focused on the Permian, those with operations in other liquids basins such as the Eagle Ford, and natural gas producers. Companies in all three categories have raised their spending plans, and "are unlikely to slow their pace during the second half", Barclays says. Service costs are expected to rise in the next 12 months, especially with regard to pressure pumping and land rigs. But only 5pc of US onshore respondents plan to reduce their rig count from present levels.

The bank remains cautious on the sector's 2019 spending outlook, seeing North America as a wild card as upstream firms navigate transitory challenges. But service firms point to an underlying robust outlook, assuming stable oil prices and tightening global supply.

"I can appreciate the market sentiment for the short term, we are still in the early innings of a strong North America cycle," Halliburton's Miller says. But the challenges facing the sector "are signs of a growing, not a shrinking market", he says.

US oil production per rig US onshore DUC wells

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