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Q2 2023 Research Theme: Market Update

A Tale Of Growing Contrasts – International Deepwater vs. US Shale

Oilfield service companies are feeling the squeeze from the recent, rapid slowdown in activity across the entire US shale oil patch, from North Dakota to Texas and New Mexico. Despite WTI still trading above $80/bbl, US onshore drilling rigs and pressure pumping units are being sold off at fractions of their replacement cost.

Liberty, Nabors and Patterson-UTI saw their Q2 2023 US pressure pumping and drilling revenues decline q-o-q by 5%, 10% and 15% respectively. This swift pullback in US shale activity also hit the annualised North America Q2 2023 revenue growth for four of the largest global OFS companies – SLB, Halliburton, Baker Hughes and Weatherford Int’l – despite their broader suite of services,

For the first time post-Covid, international and offshore revenue growth now outpaces that of North America for these global OFS companies.

Year-on-Year Revenue Growth, North America vs. International – 2022 To Date


Source: Company filings

As we discuss below, improved capital discipline, geology and natural declines will all weigh on future US oil output growth rates. The US EIA now forecasts modest annual growth for 2023 / 2024 – just 300,000 bopd – a mere fraction of the growth witnessed during the heydays of the US shale boom.

Follow the $$$$ – Upstream Investment Accelerating Internationally

Global oil demand growth remains robust and therefore, as US upstream investment slows, so the investment momentum is naturally accelerating internationally. SLB’s CEO anticipates more than US$500 billion of global upstream investment by 2025, of which over 40% will be for international deepwater oil and gas projects.

The scale, complexity, lead time and duration of such international deepwater projects speak to a renewed level of confidence across oil majors, NOCs and independent E&P companies in continued global oil demand growth and, in tandem, future oil pricing sufficient to deliver an attractive return on investment.

So, in a tale of growing contrasts, while US land rigs are being put up for sale, the global utilisation of high-spec deepwater and ultra-deepwater rigs and drillships now stands at 95%+, with dayrates for such assets consequently hitting new highs.

Not only are the vast majority of deepwater oil resources economic at US$60 Brent, indeed half are economic below US$40 Brent, but deepwater oil development and extraction offers an added environmental bonus – and a surprise for the many naysayers: the Scope 1 and 2 unit carbon intensity of deepwater oil production is now often lower than that of many onshore counterparts.

US Shale Oil Drilling & Completion Activity Down 16% Since Late 2022

US drilling & completion (D&C) activity has fallen by 16% since the post-Covid peak of late 2022 that followed a surge in activity over the last two years, largely driven by PE-backed E&P companies nimbly taking advantage of the rally in oil and gas prices on the back of resurgent post-Covid oil demand as well as Russia’s invasion of Ukraine.

US Shale Oil Rig, Frac Spread Count – Jan 2020 To Date

Source: Baker Hughes, PrimaryVision

US Lower 48 Oil Production Growth Has Stagnated Of Late

As a consequence of declining D&C activity, US oil production growth has virtually ground to a halt.

Lower 48 Oil Production, Jan 2020 To Date

Source: US EIA

But reduced drilling & completion activity is just part of the story.

1) Shale Well Productivity Shows Signs of Decline as the Best Acreage is Exhausted

After a decade that delivered dramatic improvements in shale well productivity across multiple basins, a growing body of evidence and analysis suggests that ‘high-grading’ well placement within the best Tier 1 acreage was the major driver of such productivity growth, once normalised for lateral length; other drilling and completion technologies no doubt helped but appeared to play lesser roles.

With much of the best Tier 1 acreage now drilled out in many basins, shale well productivity now appears to be on the decline. Indeed, back in March the Wall Street Journal published an article (based on Novilabs’ data analyses and proprietary ML algorithms) stating that even the key Permian basin saw shale well productivity fall last year, for the first time in the basin’s history. Meanwhile, production from legacy wells inexorably declines month-by-month.

Against such geological limits, innovative surface and downhole technologies should be of increased relevance in extending the economic life of unconventional shale oil wells.

2) Private-Equity ‘Growth Engine’ Slowed with Asset Sales To Public Companies

Growing pressure to secure further high-quality acreage – particularly for larger, publicly quoted independents and oil majors – can be seen in the recent oilpatch M&A boom which hit US$24 billion for Q223, triple that of the first quarter.

The majority of high-value transactions were buyouts of PE-backed E&P companies by cash-rich, publicly quoted independents and oil & gas majors. According to Enverus, PE firms are now substantial net sellers of upstream assets, having sold some $14 billion of upstream assets year-to-date, $61 billion since the start of 2021.

With public E&P companies already facing greater scrutiny regarding capital discipline, favouring dividends over growth, the diminished presence of the PE ‘growth engine’ will inevitably lead to slower upstream growth.

Continued Pressure On Global Oil Inventories Likely

A potential slowdown / hiatus in US oil production growth, coupled with the deeper, longer output cuts announced by OPEC+ and led by Saudi Arabia, should underpin further depletion of global oil stocks during the latter half of 2023 unless economic recession stifles robust global oil demand – currently projected by the IEA to reach a record 102.1 mmbbls/day for 2023, up by 2.2 mmbbls/day from 2022.

We therefore concur with the US EIA’s latest Short-Term Energy Outlook report which states that ‘extended voluntary cuts to Saudi Arabia’s crude oil production and increasing global demand … will continue to reduce global oil inventories and put upward pressure on oil prices in the coming months.’

US Crude Oil, Gasoline & Distillate Inventories, Jan 2020 To Date

Source: US EIA

US inventories of crude oil and key refined products have indeed continued to decline since our last report, as highlighted above, while global oil markets now appear to discount just such a production deficit: the Q4 2023 WTI calendar spread is now in modest backwardation of $1.50 per barrel, up from zero at mid-year, consistent with a significant near-term depletion of global crude oil inventories.

International Upstream Activity Exhibits Steady Growth Since Late 2020

In contrast to the recent pullback in US drilling and completion activity, the international rig count – both land and offshore – has increased steadily since the lows of late 2020.

Source: Baker Hughes

Focussing solely on the international offshore market, Rystad Energy forecasts almost US$600 billion of offshore upstream capex by 2025 for exploration, greenfield and brownfield development.

Offshore Exploration & Production Capital Expenditures

Source: Rystad Energy

As mentioned earlier, global utilisation of high-spec deepwater and ultra-deepwater rigs and drillships currently stands at 95% - 100%, accompanied by growing order backlogs. Contracted dayrates for such assets are consequently hitting new highs.

Drillship Day Rates Continue To Rebound From Cyclical Lows

Source: Diamond Offshore, May 2023

Deepwater Oil Development Offers Attractive Economics …

Some of the largest hydrocarbon resources and reserves are located in deep offshore waters. Despite the absolute cost and complexity of deepwater oil and gas exploration, development and subsequent operation of such assets, the production economics of such deepwater reserves are, by virtue of scale and technical innovation, now highly competitive with, and often superior to, onshore reserves.

Indeed Rystad Energy estimates that over 80% of such offshore oil resources, on a P50 basis, are economic at or below US$60 Brent; 50% are economic at or below US$40 Brent.

Offshore Oil Projects – P50 resource vs. Breakeven Oil Pricing

Source: Rystad Energy, Diamond Offshore May 2023

… And Low Scope 1 & 2 Carbon Intensity

Furthermore, and potentially a surprise for some observers, despite all the complex logistics and array of deepwater assets and services, the Scope 1 and 2 carbon intensity of developing and extracting offshore hydrocarbon reserves is now frequently lower than many onshore counterparts on a per barrel basis – the relative scale of reserves and well productivity being the major explanatory factor.

The ‘poster child’ for low-carbon offshore oil & gas extraction is the Johan Sverdrup field, the third-largest oil field offshore Norway, accounting for one-third of Norway’s current oil production. At just 0.67 kg of CO2 per barrel of produced oil, Johan Sverdrup’s Scope 1 & 2 emissions are less than 5% of the global average of 15 kg of CO2 per barrel.

Although Johan Sverdrup’s environmental outperformance is primarily due to imported Norwegian hydroelectric power displacing offshore gas or diesel-fired power generation, the sheer scale of deepwater oil production elsewhere allows the economic adoption of many technical innovations that reduce the carbon intensity associated with offshore oil & gas extraction and production.

Economic & Environmental Comparison – Offshore, Onshore, Shale & Oil Sands

PillarFour’s international presence provides us with a unique lens into the offshore market and various technologies that service a sustainable, low carbon intensive energy industry. As we are focused on low capital intensive and scalable technologies across numerous global basins, we expect there are several onshore technologies that can be applicable to the offshore market as well.

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