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IHS Markit: Pricing power for service sector could push up total well costs, curtailing US onshore recovery in 2018

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By Linda Hsieh, Managing Editor

The US land rig count has doubled from its nadir last year, but land drillers must be cautious about basking in “an irrational exuberance,” Stephen Beck, Senior Director and Head of North American Oil & Gas Supply Forecasting for IHS Markit, said. Speaking at the 2017 IADC Drilling Onshore Conference on 18 May in Houston, Mr Beck noted that the industry’s excitement over increasing activity levels is overshadowing the attention that should be paid to supply impacts. “Rig count recovery has already outpaced the price of oil,” he cautioned, noting that oil prices have not grown much this year to support such an increase in the rig count.

Stephen Beck, Senior Director and Head of North American Oil & Gas Supply Forecasting for IHS Markit, speaks on a panel session at the 2017 IADC Drilling Onshore Conference on 18 May in Houston. Mr Beck explained that rising service costs will likely slow US onshore production in 2018, despite considerable activity ramp-up this year.

Stephen Beck, Senior Director and Head of North American Oil & Gas Supply Forecasting for IHS Markit, speaks on a panel session at the 2017 IADC Drilling Onshore Conference on 18 May in Houston. Mr Beck explained that rising service costs will likely slow US onshore production in 2018, despite considerable activity ramp-up this year.

Going into the second half of 2017, Mr Beck said the industry will likely see increasing cost inflation, which will start to push up total well costs and, in turn, curtail growth in 2018. While the drilling sector can expect to raise their prices by 10-13% increases this year, it’s the completions side that will see the most gains – approximately 20-25%, according to Mr Beck. He pointed to an 84% utilization rate for the pressure-pumping sector as an indicator of their growing pricing power. “These headwinds are going to start coming on stronger in the second half of 2017. What that’s going to do is it’s going to slow down the rate of growth in 2018.”

For 2017, IHS Markit is forecasting the rig count will plateau around 850 to 875. “The point I want to make is that so much of this concentration in unconventional activity, horizontal drilling, all these efficiencies, longer laterals, more proppant, more frac stages… I think it’s going to have an increasingly disproportionate impact on supply,” Mr Beck said. For 2018, he’s only forecasting a 100-unit increase in the rig count.

The Permian, which includes the Wolfcamp Delaware, Wolfcamp Midland, Spraberry and Bone Spring – will continue to drive production growth from US land as it absorbs the lion’s share of US E&P investment, he said. “Our current view is that the Permian is turbocharging US production growth. We believe that’s going to be the case up through the end of this decade and partly into the 2020s.”

IHS Markit is forecasting an increase of between 900,000 to 1 million bbl/day from the end of 2016 to end of 2017 for Permian production. This represents a slight increase over the organization’s prior estimate. A main driver for this increased forecast is that the decline rate for the existing stock of wells is declining slower than anticipated. “We were actually anticipating a bigger impact in P&A activity, or shut-in’s, on stripper wells for the conventional realm than what actually came to pass. What we found is that the community of operators that were managing these small wells were actually very adroit at reducing their barrel OPEX and were able to stay online.”

Looking forward at the future of oil prices, Mr Beck said he believes that the range between $50 and $60 is the sweet spot for the industry. “At the $45 case, we don’t generate enough cash flow so the US industry needs to lean heavier on lenders,” he said, calling it unsustainable. On the other hand, $65/bbl is also unsustainable as it would be the catalyst that leads to $45 crude. “In the $65 world, what happens is basically the US Lower 48 goes into overdrive because the economics are so powerful. What that would lead to is an overspending in CAPEX, and we’ll kill the market again.”

 

 

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