North America’s onshore exploration investment could decline by more than 10% from 2018, as unconventional producers, which have driven output to record levels, face more technical challenges, Schlumberger Ltd. CEO Paal Kibsgaard said.

Speaking at the recent Scotia Howard Weil’s annual energy conference in New Orleans, Kibsgaard said there are signs that global exploration and production (E&P) investments overall are "starting to normalize" following deep cuts earlier in the decade for projects. However, North America is pulling back.

Onshore E&P investments are set to decline by 10% or more from 2018 as unconventional operators face increasing technical challenges in moving to less productive areas, Kibsgaard said.

His estimate of capital expenditure cuts mirrors a recent forecast of U.S. spending reductions year/year by Wells Fargo Securities LLC of 11%, while other financial analysts are pegging reductions of around 5-6%.

In North America land, “higher cost of capital, lower borrowing capacity, and investors looking for capital discipline and increased returns suggest that future E&P investments will likely be at levels dictated by free cash flow,” Kibsgaard said. “Based on this, we expect E&P investment levels in North America land to be down more than 10% in 2019 versus 2018.”

In addition to the impact of lower investments, U.S. unconventional production “is also facing increasing technical challenges.”

Infill drilling is creating “interference between parent and child wells.” Other challenges loom “as drilling steadily steps out from the core Tier 1 acreage, as the growth in lateral length and proppant per stage is starting to plateau, and as increased light oil production impacts domestic refining capacity.”

The myriad factors “point to a more moderate production growth from U.S. shale in the coming years. This means that investments in the international markets will need to increase further for the industry to meet the growth in global demand.”

Oil Price Sentiment Gradually Improving

Global investments still are down by close to 40% from the peak in 2014, the CEO noted.

However, even with the volatile swing in oil prices during the fourth quarter, “we still expect the supply-and-demand balance and oil price sentiments to gradually improve over the course of this year,” Kibsgaard said.

The balance should result, he said, from oil output reductions underway by the Organization of the Petroleum Exporting Countries and its ally Russia, along with expiring Iran export sanctions and a normalization of the U.S. and China “trade tensions.”

The recent oil price volatility “has introduced more uncertainty” in capital spending by the E&P sector this year, “with some customers taking a more conservative approach to the start of the year. However, we continue to see clear signs of E&P investment sentiments starting to normalize and the industry heading toward a more sustainable financial stewardship of the global resource base, including both North America and the international markets.”

Beyond the Middle East and Russia, the national oil companies and independents have begun to realize the necessity of increasing investments, he said, “simply to maintain current production levels.

“At present, the underlying decline from the aging production base in key oil producing countries like Norway, UK, Brazil and Nigeria is being offset by new project start ups as well as more exploration activity, providing solid growth opportunities for our business in the coming year.”
Investments are climbing too in Mexico, as well as Angola, China and Indonesia, where total production has declined sharply for several years.

“Based on this, we expect high single-digit, year-over-year revenue growth in the international markets in 2019,” Kibsgaard said. “Growth rates will be led by Africa, Asia and Latin America, as new investment programs are kicked off. We also continue to see solid, but more nominal, growth rates in the North Sea, Russia, and the Middle East, as existing activity and projects continues to expand.