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Shale Boom Leads Drop in Oil Prices but Market Opportunities Remain

Despite a 60 percent decline in oil prices since mid-June, the U.S.’s shale boom is forecasted to continue as the disruptive industry is proving more resilient than some analysts thought.

The U.S. Department of Energy estimates domestic oil output will increase by 600,000 barrels a day this year to 9.3 million. Some 4 million of those barrels are expected to be provided by shale producers, whose production has boomed in the past decade and left the U.S. competing with Saudi Arabia as the world’s No. 1 oil producer.

The rate of shale production growth, however, is on the decline in the U.S. This year’s increase will be half of last year’s 1.2 million barrels per day. And, according to the Energy Department, production will only increase by 200,000 barrels in 2016 as investment in shale production declines further along with falling oil prices.

James Stanczak, Vice President of Oil & Gas Market and Business Development for SPX FLOW Power and Energy, breaks down the current situation and explains where the opportunities exist in the oil and gas industry.

How has U.S. oil production disrupted global markets?

Falling oil prices have been a boon for consumers and net-energy importing countries, but have been a pain point for oil exporters. Russia, in particular, has been impacted and is forecasted by the World Bank to see its GDP shrink 2.9 percent this year. Venezuela and Iran have also been adversely impacted. Now, U.S.shale producers may be next.

Saudi Arabia, arguably one of the leading members of OPEC and a leader of past efforts to constrain oil supplies and stabilize prices, has decided to keep its production high and allow prices to fall. Most analysts believe the goal is to, at least in part, drive down investment in North American shale production. Shale oil and other non-conventional production methods have higher extraction costs than traditional drilling and are more sensitive to falling prices. It’s unclear if and how this strategy will work in the long run.

Until oil supply and demand equalize, oil prices will continue to fall. The longer prices remain depressed, the more positive impact it will have on stimulating consumer demand, particularly in oil-consuming countries. Meanwhile, negative impacts will continue on near-term oil and gas spending and on the economies of oil-exporting counties.

What is the outlook for the oil and gas industry moving forward?

The long-term outlook for the oil and gas industry continues to be bullish. Even with substantial efficiency gains in renewable (solar and wind) power generation technologies in 2014, oil and gas resources supplied over 50 percent of the world’s energy requirements. Most industry experts expect this percentage to remain at this level for the foreseeable future.

In the short-term, the outlook for global oil production, particularly in the US, depends on how long this supply and demand imbalance lasts. How that imbalance is corrected and where the price of oil stabilizes will also impact that outlook. Many exploration and production companies as well as service and supply companies supporting global oil and gas production have already announced significant cut-backs in 2015 spending. It is worthwhile to note that shale-producing wells tend to lose almost 70 percent of their production in their first year of production. This means a steep turndown in shale drilling and/or re-fracking of existing wells will lead to a steep decline in shale production in a relatively short time period.

The U.S. shale boom has created significant growth opportunities not only in the oil and associated natural gas upstream (exploration and production) segment, but also in the country’s midstream (transportation and terminals/storage) and downstream(refining and petrochemical) segments. With a long-term pullback in oil prices,we expect the U.S. upstream segment to slow down substantially in 2015. We are already seeing this slowdown reflected in a substantial drop in drilling utilization. For example, the number of drilling rigs operating in North Dakota, one of biggest beneficiaries of the shale boom, has dropped to the lowest level since 2010. Some upstream areas will slow faster than others.

Ups and downs in the oil and gas industry are not new. However, the current drop in price is the first time Saudi Arabia via OPEC has not acted as a cartel to try to “correct” the situation and minimize price “disruption.” Therefore, in the absence of any OPEC-driven supply reduction, market forces will ultimately correct this oversupply by lowering prices until supply and demand equalize. From an industry spending standpoint, the current scenario will result in an upstream slowdown, a flat midstream and a slightly increasing downstream segment growth in 2015.

What are some of the potential impacts of falling oil prices?

In the short term, on the supply side, we will likely see fewer land rigs working and fewer wells being drilled. This means less spending and a slowdown in equipment purchases in the upstream segment. Interestingly, natural gas prices have remained relatively stable and, in the U.S. for example, some land rigs are being converted from drilling for liquid hydrocarbons to natural gas in the shale producing regions.

We haven’t seen any significant fall-off in the offshore or international rig counts yet. But some of the leading indicators are pointing to a global upstream slowdown.

On the demand side, we’re already seeing higher global demand for transportation fuels such as gasoline, jet fuel and diesel due to their falling prices stimulating higher travel volume. With lower energy bills, comes higher discretionary spending,which at some point will prop up economic growth and energy demand inenergy-consuming economies.

How is SPX approaching the shale boom as a market opportunity?

U.S. and Middle Eastern midstream market growth opportunities will exist in 2015 until the current back-log of projects subsides. We expect the midstream market growth to remain at 2014 levels for most of the year, unless the project back-log falls drastically and are not replaced. Downstream activity seems poised for an up-tick. However, expansion opportunities in the U.S. will more than likely be shaped by governmental policy.

Equipment and solution suppliers such as SPX have benefited from the U.S. shale boom and the growing oil and gas infrastructure. Industry downturn tends to generate consolidation and SPX is well-positioned to weather and grow during this cycle. We have several new growth initiatives planned for introduction in both the oil and gas sectors later in 2015 that complement our current offerings.

SPX and its brands are well-known to oil and gas customers. Adding complementary products is not as difficult for us as it is for other companies with no market presence or financial strength. We know that market timing, customer acceptance and world-class sales and service as well as operational execution will be the key to achieving success.