The global oil supply is tightening, and markets should move closer to balance by the end of this year, but it’s too early for “any improvement in price” to affect exploration investments because operator confidence and balance sheets still need to be repaired, Schlumberger Ltd.’s operations chief said Tuesday.

“Taken overall, we believe that the macro view of supply continuing to tighten remains valid,” Patrick Schorn told an audience at the Simmons 2016 European Energy Conference. CEO Paal Kibsgaard said in July the oilfield services (OFS) industry downturn had bottomed during the second quarter (see Shale Daily, July 22).

“With demand holding steady, markets are moving closer to balance by the end of 2016 supporting what we have called a medium-for-longer oil price environment,” Schorn said. “This is further supported by the continuing but slowing increase in crude oil and product stocks that will temper near-term increases in oil price.”

It’s “too early for any improvement in price” to affect exploration and production investment levels “as operator confidence and balance sheets must first be repaired,” he said. “This leaves the service industry in critical condition with billion-dollar write-downs and a number of companies in financial distress if activity does not pick up rapidly.”

Schlumberger has made a case to change the way the industry works. Positive developments are underway in well design and cost that have improved drilling and completion efficiency, with some cost cuts structural and sustainable.

On U.S. land, for example, the cost of an average unconventional oil and gas well has fallen by 40% since 2014, following a combination of changes made by the operators and “the pressure that has been brought to bear on the service industry,” Schorn noted. The OFS industry also has reduced its cost base by using the most modern fleets, operating 24/7, consolidating infrastructure and employing multi-skilled crews.

“But one of the largest contributions has come from the service industry’s acceptance of lower pricing,” Schorn said. “This has now come to a point that parts of the business are financially unviable. With the price of oil having nearly doubled since the start of this year, the service industry must now seek to increase price to restore the financial viability it requires to develop and deploy technology, maintain its geographical footprint, and preserve its technical expertise.”

Schlumberger, the world’s No. 1 OFS, already has shifted its focus from managing performance in the downturn to recovering temporary pricing concessions and renegotiating contracts that have become “financially unviable.”

However, because oil prices aren’t likely to recover to previously $100-plus levels, well costs cannot return to previous levels, he said. OFS pricing recovery has to be accompanied by transforming to lower total costs — something that Kibsgaard has stressed since before the downturn. In July 2014 the CEO said Schlumberger was moving toward a general contract model to ally with other operators and to reduce costs (see Shale Daily, July 18, 2014).

“New levels of commercial alignment will more than offset the price recovery that the service industry requires and will lead to further potential savings in land well costs,” Schorn said.

Unlike land well construction, deepwater operations are characterized by bespoke solutions, because every project is different and little early supplier engagement to design and build infrastructure has been done.

“At the same time, service pricing has come under pressure but the complexity of deepwater and the need for high technology have meant that prices have fallen less than for land operations,” he said. In spite of this, the service industry must still seek to reverse those concessions granted during the depth of the downturn in order to preserve the ability of the industry to produce the vital deepwater supplies in the future.”

U.S. land and deepwater represent only two examples of how well costs may be lowered, but recovery depends on more integration and collaboration, he said.

By geography, many of the trends of the second quarter continue to affect Schlumberger’s activity in the third quarter.

“In North America, service pricing in most basins for a number of services remains at unsustainable levels,” said Schorn. “While an increase in the price of West Texas Intermediate has led to more operator confidence and a continuing increase in land rig count, this has yet to have a meaningful effect on pricing.”

Latin American activity is mixed, with Venezuela in line with collections while activity in Mexico remains low. Projects continue to be delayed in Sub-Saharan Africa, while activity in Russia has remained seasonally high during the summer. Activity in the Middle East/Asia remains “more or less flat.”

By group, Schlumberger expects its reservoir characterization business to be nearly flat sequentially from the second quarter, with slightly lower results from the drilling group. Production group activity should be “flattish” on lower stimulation vessel activity in Mexico and end-of-season fracturing campaigns in Alaska, offset by an increase in U.S. land activity.

Schorn also spent a few minutes explaining how the market recovery may play out.

“As in the past, this will not be a uniform process, neither by geography nor by group. In fact, we expect recovery to be by resource type driven by the sustainability of the price of oil.” By adopting this approach, the company should be able to focus investments needed in each business unit, in terms of capital expenditures and human resources.

“Drilling and completion activity has already begun to recover on land in the U.S.,” Schorn said. “Next, we expect to see a return to conventional land drilling internationally, followed by a recovery in shallow offshore waters, deeper offshore areas close to existing infrastructure, and finally a more complete deepwater recovery that involves new projects reaching final investment decisions and a return to exploration activity.”

By business unit, the production and drilling groups are expected to respond in line, with an increasing rig count. “The last to recover will be the reservoir characterization group, which has been impacted by the absence of exploration activity,” he said.