Oil services poised to grow in 2010

Barclays Capital has a bullish report on the global oil service industry, which it says will grow this year after passing the low point for activity in the fourth quarter of 2009. The reports predicts an 11 per cent rebound in worldwide spending on exploration and production this year.

James West of Barclays expects E&P spending to accelerate in 2011 as the cycle gains momentum:

The global oil markets remain supply challenged, decline rates are increasing and the resource base is depleting. These trends argue for higher oil prices to increase drilling activity and this is a clear positive for the oil service companies.
This cycle will likely be characterized by continued strong investment in the Eastern Hemisphere, a significant expansion in Brazil, the emergence of deepwater as the central theme and a rebirth in exploration activity.

Barclays said prospects for North America were less constructive over the next one to two years as there were considerable changes underway in this market that would keep growth at bay and increase spending volatility.

However, Russian-based oil companies are budgeting big gains in E&P spending in 2010, with all six of the large Russian companies planning double-digit gains.

On average, spending by the Russian companies is expected to jump by 20%. This compares to a sharp drop of 30% in 2009 as local oil prices fell below $10 per barrel.

Spending in Southeast Asia is anticipated to rise by 18% on average in 2010 with strong spending gains anticipated by Chinese companies (CNOOC, Sinopec, and Petrochina), Petronas in Malaysia and Pertamina in Indonesia.

The Middle East and North and West Africa region is the largest market for oilfield services approaching some $75 billion in annual E&P spending.

In 2010, we expect spending to grow by 15% compared to 2009 levels as almost every large oil company is forecasting increased activity.  Only Saudi Aramco and Qatar Petroleum Corporation are expected to reduce spending levels (by 7% and 6%, respectively).

Two areas in Latin America - Brazil and Colombia – are poised to grow significantly in 2010 – driving a 9% improvement for the overall region.

We expect Petrobras in Brazil to increase its E&P spending by roughly 25% and this is the start of what we believe will be a multi-year increase in investment while we expect Ecopetrol in Colombia to ramp up its spending by 20% this year. In Mexico, E&P spending is likely to decline 6%.

The natural gas market in north America is in the midst of a “structural upward shift in supply”, according to Barclays as technological innovation have unlocked an immense supply of unconventional gas resources, in particular shale gas.

Shales currently represent the most prolific source of natural gas in the domestic US market and the government (EIA) estimates of reserves are eye-catching:

The EIA estimates the domestic unconventional base at 1,046 Tcf (33% greater than conventional reserves), with shale gas comprising 55% (500 Tcf) of this amount. However, data from various basin level analyses suggest that the total recoverable unconventional base could be as high as 1,500 Tcf, with 780 Tcf coming from shales.

Production rates look similarly staggering:

Shale wells have yielded production flows averaging between 2 MMcfpd to 15 MMcfpd (rates as high as 26 MMcfpd have been recorded in core regions of the Haynesville Shale). By comparison, the best conventional wells generally produce at 1 MMcfpd or less during their first year. Decline rates for shales, however, are estimated at 80% in some cases. As shale resources continue to come on line, we expect a supply overhang to pervade the natural gas market.

So this surge in activity may be too much of a good thing:

The increase in shale drilling that began in late 2009 and is set to continue in
2010 will add production to an already oversupplied market and will cause natural gas prices to fall.

Four areas of focus are highlighted for 2010:

(i) International Shale Plays.

The transfer of shale drilling and completion technology from North America to the international markets could drive growth for the oil service industry.
This is especially true for those technologies that are heavily utilized in shale plays such as pressure pumping, proppants, stimulation equipment, and fit for purpose rig technology.
The emergence of international shale plays will likely start with Central Europe and spread to other areas like North Africa, India, China and Australia.

(ii) Iraq. The return of the oil industry to Iraq will be a very significant event for the oil service industry.

Iraq could become a $3 billion-$5 billion annual market for the oilfield service companies by year-end 2010 and may rival some of the largest markets in the world over the next decade. This compares to a market size of less than $500 million today. The vast majority of oil service contracts will be for IPM or fixed price work which will play into the strengths of the larger, diversified oil service companies.

The newest estimates suggest Iraq could have even larger reserves than Saudi Arabia:

Iraq has approximately 115 billion barrels of proved oil reserves, representing about 9.1% of proved reserves worldwide. However, these estimates are to a large extent based on old, 2-D seismic data from the 1970s. Some estimates of reserves by Iraqi officials range to as much as 350 billion barrels – which, if confirmed, would exceed even Saudi Arabia’s 264 billion barrels of reserves.

And don’t forget about its potential for producing gas:

Iraq also has an estimated 112 Tcf of natural gas reserves. The Iraqi Oil Ministry has adopted a ten-year strategic plan which calls for an increase in the country’s oil output to 6 million barrels per day by 2017 (up significantly from 2008’s average production of 2.4 million barrels per day). This will likely create a gold rush for the oil service industry.

(iii) The Arctic - largely unexplored it could hold a quarter of world’s remaning reserves.

Chilly though – and kind of problematic.

The challenges are significant and include ice management, ship operations and supply in ice-bound areas, strong currents, transportation challenges, icebergs and additional environmental concerns.

However, despite the challenges the major oil companies are pushing into the region.

Exxon, BP and other major oil companies are active in many of the regions and may be nearing the start of substantial drilling programs. Most of the applications will require technology that has been developed in deepwater provinces and recent press reports have discussed the potential for a new arctic class rig design that would be owned by Transocean and work for Exxon in the Arctic.

(iv) West Africa – the next area of interest for the deepwater industry.

The significant geological success that has recently occurred offshore Brazil in “pre-salt” areas is igniting interest in similar drilling programs offshore West Africa. Plate tectonic theories suggest the geology is similar. This could be the next major inflection point for the deepwater industry. Pre-salt discoveries in Brazil led Petrobras to seek to double its deepwater rig count – a similar trend could play out in West Africa, stressing the deepwater business further.