The outlook for oil and gas drilling is strong, particularly in the United States. This year signified a shift in the oil and gas industry as oil prices have increased by more than 50% since their January 2016 lows. Now, we see the gap between global production and consumption beginning to narrow. While we are certainly in a challenging commodity environment, worldwide demand for oil continues to rise. That means more and more companies are going to start deploying additional capital to drill new wells.
The surge in US oil and gas production in the past five years has led to a restructuring of the global energy industry, diminishing the influence of OPEC. Recently, OPEC took action to limit its production to 32.5 million bbl/day from its record-high of around 33.25 million bbl/day. This is the first time in eight years that OPEC has taken action to reduce their production, further demonstrating US producers’ resiliency to a challenging market.
As we look at what is to come in 2017, we can expect an upturn on the horizon for the US. Speculating on what will happen with the market is, by its nature, challenging in a world with OPEC countries manipulating prices, but we can use fundamentals, such as historical trends and economic factors, to form an educated forecast.
Recent surveys of E&P companies estimate that global upstream companies need a minimum of $3 trillion CAPEX between 2016-2020 to ensure long-term sustainability. Global capital expenditures for drilling were down 42% for 2015-2016 combined (from the high in 2014). The mix between offshore and onshore CAPEX spending is also shifting dramatically. An article in NGI’s Shale Daily stated that “global offshore rig expenditure will fall 88% from 2013’s peak by the end of the decade.” That same article went on to state, “After two years of declines, global onshore growth should return in 2017, outstripping offshore spend by more than $3 billion for the first time since 2012.”
As a regulator of oil and gas in Texas, the largest oil and gas producing state in the country, I know that what we do in our state in the oil business reverberates around the world. Texas producers have come up with new technologies and methodologies that are enabling us to capitalize on opportunities in ways that are reshaping the industry on a global scale.
For a number of reasons, I have been bullish in my predictions that we will see $60/bbl next year, and it should be noted that a variety of factors are contributing to the expected rise of oil prices in 2017. To explain this forecast, we must focus on where investment is going.
If you look at the shift in the global landscape of where people are investing their dollars, they’re looking more at Texas today than they have in 50 years. For example, the Permian Basin has experienced multibillion-dollar acquisitions with some acreage prices eclipsing $60,000/acre. Concho Resources’ acquisition of Reliance Energy assets for $1.65 billion to increase its position in the Permian was more than $40,000/acre. M&A activity will continue to increase in Texas due to the world-class asset plays and the ability to put capital to work to quickly develop new production and generate immediate cash-flow.
In 2013 the Railroad Commission of Texas approved 26,000 drilling permits, the majority of which were vertical wells. In 2015, permits dropped to just over 14,000, but 57% of the approved wells were horizontal. As of September 2016, the commission approved 20,000 wells, 56% of which were horizontal. This is a trend I expect to continue as horizontal wells allow producers to develop more acreage, minimize the surface impacts of drilling and net a bigger return on investment.
We have also seen the reallocation of resources used for offshore drilling to onshore drilling, where a spud-to-production process can take months instead of years. Now more than ever, major players like Apache and ExxonMobil are investing capital in low-cost drilling areas, such as West Texas. The recent discovery of up to 3 billion bbl of oil and 75 trillion cu ft of gas in the Delaware Basin is just one example of the exploration revival. In September 2016, approximately half of the US onshore rig count was located in the Permian. Although capital expenditures domestically are down 15% from last year, according to CEOs in the Permian, Texas is poised for explosive growth as supply and demand come into alignment. Scott Sheffield of Pioneer Natural Resources recently said in a news article that the Permian will experience an increase of 100 rigs in 2017 as more capital is allocated to that area. I agree with Scott’s assessment.
The fundamentals indicate a rebalancing of production and consumption. New discovery drives further development, requires the building of infrastructure and creates new jobs. With the global drop in production, increase in consumption and per capita energy usage, it’s fair to say that we should see production and consumption continue to align in 2017.
We know that the energy industry in Texas is leading America toward a position of global energy leadership, and the Permian is an area that will see increased drilling activity. As we transition away from large, expensive offshore projects that take years to develop and exponentially more dollars to fund to shorter-term and less expensive onshore projects, our next question should be who will be the swing producer of the future — is it going to be OPEC and Saudi Arabia, or will it be the shale producers in the US who continue to drive down drilling costs and gain even more production efficiencies? DC