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 “The current situation is not sustainable” – Schlumberger CEO Paal Kibsgaard

Production has held up well over the downcycle, but headline numbers of absolute production volume are masking an underlying problem that could soon hit the oil and gas industry, according to Schlumberger (ticker: SLB) Chairman and CEO Paal Kibsgaard. Underinvestment over the last three years means production is not being replaced by further exploration, leading to faster depletion of known resources, and potentially, a resource crunch in the future.

Decline rates can be minimized by either adding more reserves or by producing existing wells harder, said Kibsgaard. “In a scenario where the additions of proven developed reserves are curtailed through lower investments while production is upheld by producing wells harder, the decline rate will be low and the production base will falsely appear to be very resilient,” said Schlumberger’s CEO.

“However, the real picture is such a scenario is told by the depletion rate, which will show an increasing trend since production is kept at high levels with little to no additions to proven developed reserves.”

Schlumberger depletion rates for offshore projects

Depletion rates have already increased 15% to 20% in the world’s major offshore basins, according to Schlumberger. Production has remained relatively stable in each, giving the impression that production is resilient, but as reserves are depleted and no replacements found because of lower investment over the last three years, the resource still in place will be quickly produced and there will not be enough supply to meet demand.

U.S. onshore leading the recovery, but unable to meet future demand alone

The only region in the world showing clear signs of a recovery at the moment is North America, said Kibsgaard. Drilling activity and investment are increasing from 2016 levels, but even with a corresponding increase in production, it is unlikely the U.S. will be able to meet growing global demand on its own.

Kibsgaard noted that the financial viability of U.S. acreage outside Tier 1 assets is still questionable given current oil prices and that tight oil will not be able to meet demand for heavier crude grades. Much of what is produced in the U.S. is light-sweet crude oil and cannot replace heavier grades used for refinery blending.

Schlumberger US and international rig counts

An “impending cost inflation avalanche” will also affect economic viability

Adding to the list of reasons that U.S. production will be unable to match world demand alone, Kibsgaard said there is an “impending cost inflation avalanche coming from the service industry, which continues to operate at unsustainable pricing levels.”

Schlumberger’s CEO said that E&P companies have reduced breakeven costs over the downcycle, but increasing service costs will “ultimately end up in the financial results of the E&P operators.”

EnerCom Analytics ran well economic models in the Midland, Delaware, Bakken, Eagle Ford, Marcellus and Niobrara at different oil and natural gas prices taking into account potential service cost inflation in its March Energy Data and Trends report. To find out which basins will likely remain economic, and what operators are doing to combat cost inflation, purchase the monthly report here.

To find out which basins will likely remain economic, and what operators are doing to combat cost inflation, purchase the monthly report here.

Schlumberger and Weatherford form a completions JV

On March 24, Schlumberger announced that it would form a joint venture called OneStim with Weatherford (ticker: WFT) targeting completions products and services for unconventional drilling in the North America. The JV will have a 70/30 ownership with Schlumberger holding the larger share. Weatherford will receive a one-time $535 million cash payment from SLB as part of the deal, which is expected to close in the second half of the year, according to the company’s press release.

“The majority of the cash payment we made as part of the deal was linked to the value of the Weatherford multistage completions business, which is an area we have been looking to invest in for a number of years,” said Kibsgaard.

According to the press release, Weatherford will contribute its multistage completions portfolio, regional manufacturing and supply chain. Schlumberger will provide the joint venture with access to its surface and downhole technologies, operational processes and geoengineered

“The OneStim JV will provide us with the scale that is required to drive operational efficiency and improve full-cycle returns in the large, but challenging North America land production market,” said Kibsgaard.

Schlumberger OneStim slide

To find out which basins will likely remain economic, and what operators are doing to combat cost inflation, purchase the monthly report here.

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