Oil companies are becoming more cautious about spending on production growth. This shift is driven by concerns over an oversupplied market and lower oil prices compared to last year.
SLB, the world’s largest oilfield services provider, highlighted this trend in its third-quarter earnings report. The company noted ongoing weakness in the short-cycle market, particularly in U.S. shale.
While offshore and long-cycle spending remains relatively strong, U.S. activity and spending are decreasing. SLB executives indicated that this trend is likely to continue into next year. SLB’s CEO, Olivier Le Peuch, emphasized that offshore drilling will be a key growth driver for the industry moving forward.
During the earnings call, Le Peuch commented, “This performance was achieved despite a softer growth environment for short-cycle activities. Some international producers are exercising caution in their spending due to lower oil prices and abundant global supply, while land activity in the U.S. remains subdued.” Compared to last year, SLB’s outlook is less optimistic.
In October 2023, Le Peuch had expressed confidence in a “multiyear growth cycle,” with increasing upstream spending on gas production and long-cycle developments. However, one year later, while international spending is still rising, many oil and gas producers are adopting a more conservative spending approach.
“Although upstream spending growth has slowed recently due to broader economic factors, we expect a sustained level of investment in the coming years,” Le Peuch stated.
SLB predicts that offshore investments will lead the way, given its greater exposure to international markets compared to U.S. shale, where growth has stagnated. Le Peuch projected that by 2025, upstream spending in international markets could grow in the low to mid-single digits, while spending in North America may remain flat or decline slightly.
The company will update its 2025 outlook in January, after gathering more insights on customer budgets.
Currently, oil prices are under pressure due to fears of an oversupplied market, driven by increased output from non-OPEC+ producers, uncertainties surrounding OPEC+ supply, reduced demand from China, and slowing economic growth in the U.S. and Europe. Le Peuch remarked, “This has led to a cautious approach to activity and discretionary spending by many customers, as shown in our third-quarter results.”
Despite these challenges, long-cycle deepwater projects and capacity expansion in the Middle East remain favorable from an economic and strategic standpoint. However, SLB does not foresee a rebound in U.S. activity soon. Any potential increases in gas rigs might be offset by a decline in oil rigs due to enhanced operational efficiency.
Declining U.S. Shale Activity
For the fourth quarter, SLB expects exploration and production (E&P) companies to exhaust their budgets for U.S. onshore drilling. There is also cautious discretionary spending from some international customers.
SLB is not alone in its warnings about lower U.S. spending and activity. Smaller service providers are facing a tough market, as slowing activity is affecting their pricing. Liberty Energy recently reported that the fracturing market is adapting to reduced E&P operators’ development programs for 2024, following strong efficiency gains in the first half of the year.
Efficiency in U.S. shale production has significantly increased. According to Wells Fargo, oil output per rig rose by 13% last year and is projected to grow by another 15% in 2024.
In response to current market pressures, Liberty Energy plans to modestly reduce its fleet size by about 5%. The company noted, “Increased uncertainty in energy markets has made operators hesitant to ramp up completions ahead of the new year. We now anticipate a low double-digit percentage reduction in fourth-quarter activity, more than the usual seasonal decline.”
They expect completions activity to rise early next year to support stable E&P oil and gas production targets. Liberty Energy noted that U.S. crude oil production has remained relatively flat since late 2023 and may decline if current completion levels persist.
A recent Dallas Fed Energy Survey revealed that service providers are struggling with increased uncertainty and operator consolidation, which are particularly challenging for smaller oilfield service firms. Executives noted that the consolidation of operators in the upstream sector is making it difficult to maintain skilled labor.
As lower oil prices and heightened uncertainty lead upstream operators to be more cautious about spending, especially in the U.S. shale market, the long-term fundamentals of oil and gas remain largely unchanged. Energy security and rising demand will continue to benefit the service providers that can navigate this current downturn effectively.
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