|Additional onshore and offshore
oil and gas supply is expected to come online in 2017 and
hinder an oil price recovery (Source: Jerry and Pat
A turnaround in oil and gas industry
investments is unlikely to materialise before 2018, according
to the latest data from research and consultancy firm
Douglas-Westwood (DW), as demand growth over the next year is
likely to be outweighed by supply growth.
This month, the US rig count slumped to
its lowest levels since records began, and onshore drilling
– a major end market for industrial minerals like silica (frac) sand, barite (barytes) and bentonite – has
been the hardest hit.
Onshore activity fell 30% in 2015 and a further 20% in 2016
with rig count dropping to a low of 417.
In a recent webcast discussing DW’s world
drilling and production figures for Q2, DW director Steve
Robertson said that the near term outlook for oil prices is not
a positive one.
"There is significant additional oil coming online and gas
is also expected to have production growth," Robertson said.
"When oil prices pick up, what’s left there to
reach the demand? 350,000 people have lost their jobs. E&P
companies are now focused on free cash flow driving cuts but
this is all brewing for a big problem towards the end of the
In both onshore and offshore drilling, the industry has seen
a 45% reduction globally since 2014. "It’s not
just a downturn localised in America, we’ve seen
the hit in China as well," Matt Cook, the author of
DW’s World Drilling and Production Market
Outages in Canadian and Nigerian oil production have helped
to rally oil prices from record lows, while output reductions
in US shale as a result of bankruptcies and capex cuts point to
an anticipated decline in onshore oil production for the first
time in seven years.
"In 2016 onshore activity will decline for the first time
since 2009. But in 2009 there was a strategic output cut versus
now when we are seeing production cut due to bankruptcies and
capex reductions," Cook added.
However, despite supply coming offline and the recent oil
price rally in 2016, Cook says 2017 represents a major threat
rather than a potential turn around for oil price recovery.
"DW predicts offshore oil output will increase 1.8m barrels
per day (bbl/d) in 2017 as a result of the implementation of
projects sanctioned before the downturn," Cook said. "This will
probably lead to an increase in the oversupply and suppression
of oil prices." He added that deepwater drilling is not
expected to recover significantly until the 2020s.
Over the next year, DW expects large gains in the US and
Middle East particularly in offshore products will be a key
threat to oil prices and limit any growth in the sector, Cook
said. In onshore production, gas output is expected to increase
everywhere apart from Europe, growing twice as fast as oil
"2019 might see some kind of equilibrium as offshore
additions peak," he conceded, but it might be some time before
the market sufficiently recovers.
When questioned on the effect that Brexit might have on oil
and gas prices, Cook was not optimistic: "Even just thinking
about leaving the EU – the oil prices were wavering
before the referendum was held."
"In terms of the UK sector itself, Brexit could mean some wage
increases," he added. "Pump prices are going to go up,
particularly for diesel if the pound is weaker, when it comes
in at petrol stations. There has been a lot of concern about
regulations in terms of operators investing in new projects,
which is something the UK has struggled with over the years
anyway since the production peak and unfortunately this could
have quite a negative impact."
|Matt Cook and Steven Robertson
of DW discuss oil and gas outlook in the company's Q2
drilling update (Source: DW)
In the long term, DW has predicted a potential supply crunch
looming in 2020, as cuts in current investment are likely to
have a big impact on production towards the end of the
"Excess oil supply will erode and we will not have new
projects in the pipeline to overcome production decline from
existing field," DW outlined during its webcast, adding that
much of the 350,000 industry job losses are likely to be lost
to the industry forever, while the equipment that has been
idled will deteriorate as it is not used.
Onshore production outlook
According to Cook, US shale oil drilling is unlikely to
return to pre-downturn levels until well into 2020s. Activity
in China is also anticipated at lower levels than previously
predicted owing to a suspension of polymer flooding, although
onshore drilling in the Middle East
– which is already at record levels
– will continue to steadily increase.
It is the Middle East then that will drive an increase in
global production in the mid-term, while a resurgence in the US
in the long term will drive increases in oil output.
Latin American production of onshore oil meanwhile is
expected to suffer owing to reserve issues in Colombia and
financial difficulties in Venezuela, Cook said. The biggest
production gains between 2016 and 2020 are expected from
Canada, from its various oil sands projects; Iran, following
the lifting of sanctions; Iraq, from the Integrated South
Project, and from Saudi Arabia's Khurais and Shaybah oil
With onshore gas, although drilling this year is anticipated
at just 17% levels seen in the 2006 drilling peak, DW
anticipates that 1% more wells will be drilled in 2016-22 than
in the previous seven year period, with increased activity
expected in East Siberia for the Russia-China supply deal.
Interest in China's shale sector is also gaining momentum on
the back of interest from international players.
Hanging on a rig count
DW’s predictions of a potential uptick in oil
and gas next year only to be followed by another crash are no
doubt unwelcome news to oilfield mineral and services
This week a number of major industrial mineral producers
announced second quarter results. While almost every sector
has, in some shape or form, been affected by the oil and gas
downturn, those directly supplying to the sector have reported
Carbo Ceramics Inc., Halliburton Corp. and Baker Hughes Inc. all
reported net losses for the last quarter.
Baker Hughes cut around 3,000 additional jobs in Q2, taking
its 18-month total to 26,000 job cuts, predicting that there
would not be any meaningful improvements in the second half of
the year as oil and gas activity is forecast to continue its
While some companies have latched on to recent oil price
improvements as an indication of market turnaround, Baker
Hughes anticipates that industry participants will wait for a
more sustained oil price uptick before committing to any new
Halliburton CEO, Dave Lesar, however
pointed to a recent increase in rig counts as an indicator that
the market "has turned", noting in the company’s
financial results last week that the 78% drop in rig count from
2014 levels had finally reached a floor.
"We believe the North America market has turned," the
company’s CEO, Dave Lesar, said. "We expect to see
a modest uptick in rig count during the second half of the
year. With our growth in market share during the downturn, we
believe we are best-positioned to benefit from any recovery,
including a modest one."
Despite OPEC's strategy of maintaining crude supply, oil
prices have recently rallied back to $50/bbl, initiating a
slight rebound in the North American rig count – which
had previously been declining with oil prices hovering around
The higher rig count, has no doubt encouraged E&P firms
that have until now held off on production to start pumping oil
again, as Thomas O’Donnell, senior energy analyst
at consultancy Wikistrat, told CNN Money: "You can get
a herd mentality. Nobody wants to be the last one back."
Although this may be good news for oilfield suppliers in the
short term, increased activity echoes DW’s
mid-term outlook and warning for the next year: additional new
production remains a key threat to an oil price recovery.