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By Adewale Sanyaolu
Global research and consultancy group Wood Mackenzie, has said that the current global annual investment clip of around $500 billion into upstream oil and gas is sufficient to meet peak oil demand in the 2030s.
According to WoodMac, this will be achieved through 3 main routes: the development of giant low-cost oil resources, relentless capital discipline, and a transformational improvement in investment efficiency. WoodMac expects oil demand to peak at 108 million barrels per day (bpd) in the early 2030s before beginning its long–term decline.
Last year, oil prices hit multi-decade highs shortly after Russia invaded Ukraine, prompting the Biden administration to urge U.S. producers and OPEC to ramp up production at a faster clip so as to rein in spiraling oil prices.
However, Saudi Arabia and its allies responded by doing the exact opposite, cutting production when oil prices started plummeting. Predictably, the United States and Europe were irked by the cartel’s defiance, with President Joe Biden’s administration accusing Saudi Arabia of colluding with Russia and supporting its war in Ukraine.
Well, President Biden can at least thank his lucky stars that the U.S. Shale Patch paid heed to his clarion call: the Energy Information Administration (EIA) has forecast total U.S. output will hit 12.61M bbl/day in the current year, eclipsing the previous record of 12.32M bbl/day set in 2019’s and easily beating last year’s 11.89M bbl/day. U.S. crude oil output is up 9% Y/Y blunting OPEC’s efforts to keep supplies low in a bid to goose prices.
There is little doubt the U.S. Shale Patch is largely responsible for keeping oil markets well supplied and oil prices low: Rystad Energy has estimated that whereas OPEC and its allies have announced cuts amounting to ~6 per cent of 2022’s production, non-OPEC supply has made up for two-thirds of those cuts, with the U.S. accounting for half of that.
After years of rising production costs amid post-pandemic inflation, the Shale Patch can finally breathe a sigh of relief after the cost trajectory hit a turning point. Production costs fell 1 per cent year-on-year in the second quarter, marking the first time they have shrunk in three years.
Drill pipe prices have halved this year, daily rig rates are down by more than 10 per cent, and the costs of steel and diesel are also trending lower. According to Goldman Sachs via Bloomberg, Drill pipe prices have fallen by 50 per cent this year; daily rig rates are down by more than 10 per cent, while the costs of diesel and steel have been gradually declining. Only labor has been defying this trend as wages continue rising.
Whereas a decline of a single percentage point might not make much of a difference to the bottom line, Goldman says costs will be 10 per cent lower in 2024, enough to boost profits and cash flows significantly.
Easing price pressures are most welcome: after two years of bummer earnings and copious cash flows, the U.S. oil and gas sector is set to record a decline on both metrics in the current year.
