2018 has been a great year to be in the oilfield. With the recovery and resulting boom in full swing, many oilfield service companies are busier than they have ever been. However, while all industry analysts generally view the next year with optimism, even booming markets face serious challenges. What follows is a roundup of several of the major events that have shaped the oilfield this year and have the potential to shape it for the coming year.
United States Probably World’s Largest Oil Producer
The Energy Information Administration believes that the United States became the world’s largest energy producer earlier this year, exceeding production levels from perennial 1st and 2nd place producers Saudi Arabia and Russia. Since definitive production numbers from these two countries are hard to verify, there is some question as to when the United States took the crown. However, while energy production has been surging in the US, both Saudi Arabia and Russia have been curtailing their production due to the existing OPEC agreement aimed at bringing the energy market into balance. As such, it remains to be seen whether the United States can maintain its status as President Trump has called on OPEC to increase production to fight against oil prices that have almost tripled since 2016 lows.
Permian Pipeline Pressured
While the oilfield is currently booming, growth in the Permian Basin is being constrained by insufficient pipeline capacity. As it stands, the Permian Basin has capacity of 3.1 million barrels a day split between pipeline capacity and local refinement, while production stands at nearly 3.5 million barrels. The surplus production is currently being stored or exported using less efficient methods, such as rail and truck. This is leading crude producers to discount crude in Midland, sometimes by as much as 25%. This price cut combined with rising costs of material and labor is leading to concerns that production growth will stall despite a healthy market.
However, some midstream analysts are concerned that the current pipeline capacity crunch has caused companies to over-invest in new pipeline projects. When these new pipeline projects come online around 2020, an estimated 2.6 million barrels of additional capacity will hit the market. Analysts fear that this spike in capacity will cause a glut that could largely disrupt the market for pipeline operators.
Refinery Maintenance Season is Here
Starting in September, US refineries will begin their regularly scheduled maintenance programs that are expected to stretch through the entire month of October. Analysts are expecting crude stockpiles to grow during this outage, potentially depressing prices in the near term while waiting for refining capacity to come back online. This year is notable in that several regions will take a historically higher amount of bpd of capacity offline than in previous years. For instance, U.S. Midwest is expected to take over 825,000 bpd of refining capacity offline, almost 50% more capacity than last year’s 560,000 bpd.
In total, more than $170 million dollars in refinery maintenance projects are scheduled in the United States throughout the 4th quarter of the year. Part of the increase is due to new emissions regulations on bunker fuels that require vessels to use fuel with sulfur content of 0.5 percent or less. This has prompted many refiners who are producing bunker fuels to retrofit their refineries to increase capacity on the new lower sulfur variants in preparation for the rules to come into effect in 2020.
Some energy analysts believe that maintenance season is already priced into oil since it is an annual occurrence and demand decreases are expected at this time. Adding to the price uncertainty is the potential impact hurricane Florence or other hurricanes will have on demand as affected regions begin the process of rebuilding and recovering.
Supermajor Cost Reductions Likely Bottoming Out
In the latest version of its Supermajors Cost Index, Apex Consulting has reported that costs for BOE (barrel of oil equivalent) development for the world’s largest oil producers has declined by more than 41% since 2014. However, when looking at historical trends of production costs, barring any major new technological developments or production techniques, they believe that cost reductions have likely bottomed out.
Several factors are contributing to this analysis. First, there are rumblings that most of the most productive wells have already been drilled. This means that not only are new wells not as productive when they are first drilled, they are using more proppant to maintain production and their production is diminishing faster. That leaves upstream production companies in the position of needing to drill more wells to maintain the same production levels, increasing costs per barrel.
Additionally, cost-cutting measures undertaken during the last supply glut has left most of these companies much leaner and more efficient than in years past, leaving few additional process efficiency improvement opportunities.
Debt cut by all major oil companies
However, despite cost reduction efforts bottoming out, good demand and rising oil prices have allowed oil companies to reduce absolute levels of debt for almost 2 years straight, leaving them at the lowest levels since the third quarter of 2014 according to the EIA. If production crises, geopolitical tensions, and robust market demand continues through the rest of the year, most of the reviewed companies will continue to improve their market capitalization and generate significant cash. Expect any increase in oil prices to correlate directly into increases in capital expenditures, especially ones geared towards expanding exploration and development efforts.
