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Fragile oil price recovery

The upstream benefited from higher spending in 2018, thanks to higher prices; but this increase was tentative, and signs of lower prices towards year-end forced a downturn in rig counts

With spending returning on the back of stronger oil prices, 2018 saw a recovery gain traction in the global oil and gas upstream sector, with activity overall heading in an upward trajectory—though the story was mixed, with shale doing better than conventional projects.

After collapsing between 2014-16 by over 40pc amid the downturn, an upstream recovery that saw 4pc growth in 2017 was in 2018 expected to accelerate to 5pc, accounting for projects worth $472bn, the International Energy Agency (IEA) said in its World Energy Investment report.

Here, it was the US shale success story that was driving much of the growth. Capital spending in the US shale patch was expected to increase by 20pc in 2018 after a 60pc jump in 2017, as shorter-cycle projects took precedence over offshore and oil sands ventures, the IEA noted. This growth would see shale's share of global total investment rise to 25pc in 2018, while the main spending sector, onshore conventional resources, will see only a slight uptick to 40pc of the total.

According to the IEA, oil majors were increasingly raising their profile in the shale basin. US giants Chevron and ConocoPhillips each boosted production by 250,000bl/d in Q1 of 2018, an increase of 65pc and 18pc in year-on-year terms respectively.

In the conventional upstream space, the IEA noted that companies are also increasingly turning to brownfield sites to mitigate capital risk. The agency predicted that greenfield investment will fall to just one-third of total investment in 2018 as the industry tries to limit upfront costs. This will impact decline rates at mature fields. In 2017, the post-peak decline rate rose to an average of 7pc from 5.7pc in the period 2010-14.

Although there was evidence of some increases in upstream funding in 2018, this was not yet back at the pre-2014 level. The IEA anticipated investment will total $51bn in 2018—a drop of 6pc from 2017. More strikingly, exploration will only comprise 11pc of the total upstream spending, the lowest share ever.

Some global areas attracted upstream investment in 2018. Auctions in Mexico in January and March raised over $100bn from more than 70 companies as reforms reduced the dominance of Mexican NOC Pemex.

81.4pc—the GOM rig utilisation rate in late November

However, the project momentum that carried Gulf of Mexico (GOM) exploration through the initial industry downturn ran out of steam earlier in 2018. The same mass and velocity that made activity hard to stop had the opposite effect. All across US GOM waters, immense project costs, risks and lead times combined to challenge the most positive outlook.

Whatever looked doable at mid-year was eroded further in late 2018 by the November price meltdown. WTI prices fell steadily from the mid-$70s/bl in early October to just below $60 on 12 November, capped off by a one-day, $4.24 plunge to a mere $50.39 on 23 November.

Even as US GOM oil production rose, drilling activity still faltered. The increase in wells drilled, based on deep-water development, did not materialise in 2018. While $60 oil had hinted at an upswing, operators were slow to react, and the November 2018 oil price meltdown will be a further deterrence.

Years of weak commodity prices have significantly reduced GOM exploration activity. As late as September 2018, IHS Markit was estimating that average global demand for mobile offshore drilling units would increase 13pc between 2018 and 2020, assuming the offshore market emerged from its prolonged downturn. If November's oil price activity were to continue for more than a few weeks, the IHS Markit outlook for an offshore recovery would be delayed and perhaps in doubt.

The US GOM rig count remained anaemic in late 2018. The Baker Hughes rig tally for 21 November, 2018, was only 25 rotaries, up from 22 a year earlier. This compares to 23 active rigs on 23 November, 2016, and 30 units operating on 20 November, 2015.

IHS Markit's Petrodata said the US GOM marketed rig utilisation rate was 81.4pc in late November, based on 43 units being marketed and 35 contracted. That contrasts with the same week in 2017, with a 66pc utilisation rate derived from 53 rigs marketed and 35 contracted.

Deep-water operator activity shrank. In March, the US Bureau of Safety and Environmental Enforcement (BSEE) identified 45 active deep-water GOM sites versus 49 in February 2017. By 20 November, that number had shrunk to 36. The number of active companies totalled 17 in March 2018 and 15 in 2017, sinking to just 11 by 20 November. Shell remained most active, with nine projects.

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