US shale players are expected to focus investments on drawing down the large inventory of drilled and uncompleted wells at the start of the year, with the market still feeling the effects of the steep oil price drop in last year’s fourth quarter, writes Eoin O'Cinneide.

Oilfield services rivals Schlumberger and Halliburton, which both reported increased full-year profits within the past week, have each warned of weakness in the North American onshore sector in the first quarter, but also pointed to longer-term growth prospects — albeit possibly at lower levels than in recent years.

“The end of last year saw a large swing in commodity prices, with both Brent and WTI retrenching over 40% to levels not seen since June of 2017,” said Halliburton chief executive Jeff Miller.

“The oil price has been gradually climbing since then and that’s a welcome development. But increased price volatility creates near-term headwinds as we enter 2019.”

Halliburton chief financial officer Lance Loeffler added that revenues from both the completion and production and the drilling and evaluation divisions in the first quarter will see a drop on the fourth quarter “in the mid-to-high single digits”.

Positive signs in the sector, however, include an improved oil price since the turn of the year, the build-up of drilled but uncompleted wells and an expected alleviation of takeaway capacity constraints in the core Permian basin in the second half, which should see oil companies ready fresh production in the second quarter.

Schlumberger chief executive Paal Kibsgaard said in an investor call: “For the North America land E&P operators, higher cost of capital, lower borrowing capacity and investors looking for capital discipline and increased return of capital suggests that future E&P investments will likely be at levels much closer to what can be covered by free cash flow.”

Kibsgaard sees a “slow but steady” recovery in hydraulic fracturing work over the course of this year, although there will also be a potentially lower rig count in the US.

This will see spending in 2019 being flat against last year, with a relatively slow start to the year.

Kibsgaard said US shale operators are likely to focus spending on the inventory of drilled but uncompleted wells built up as a result of a drop in the oil price and the Permian constraints issue.

“This approach will still drive production growth from US land in 2019, but likely at a substantially lower rate than the 1.9 million barrels per day seen in 2018 and potentially with a further reduction in the growth rate in 2020,” Kibsgaard said. He also bemoaned what he termed “the unavoidable treadmill effect of US shale production”, where an increasing number of wells is having to be drilled to offset the decline in the production base.

Last year this amounted to 54% of total capital expenditure, but this is set to increase to 75% in 2021, he said.

“Add to this the emerging challenges of production per well as infill drilling creates interference between parent and child wells, as drilling steadily steps (on) from the core tier one acreage and as the growth in lateral lengths and proppant-per-stage is starting to plateau, we could be facing a more moderate growth in US shale production in the coming years than what the most optimistic views have been suggesting,” Kibsgaard warned.

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