‘Another leg up’: Experts see oil price surge powering upstream activity in 2022

In the 18 months since US crude oil prices plunged below zero, international benchmark Brent crude futures have soared past pre-pandemic levels to about $85 per barrel and US West Texas Intermediate futures have surged to around $83.

Although US rig counts have seen recent gains, these have resulted from decisions taken before oil prices surged above $80 per barrel, and US producers are still focused on capital discipline after last year’s historic price collapse, analysts told Upstream.

As annual budgets are drawn up, however, they expect producers will further ramp up activity in 2022.

“We’re starting to hear more noise with respect to taking sanction on new projects,” Ruaraidh Montgomery, global head of research for Welligence Energy Analytics, told Upstream.

“We do expect to see a pickup in budgets for next year versus this year. And that will manifest itself in increased activity levels.”

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Brent futures settled at $85.08 per barrel and West Texas Intermediate settled at $82.96 on Tuesday. Both benchmarks were up this week by more than $40 from a year ago.

Brent futures settled at $85.08 per barrel and West Texas Intermediate settled at $82.96 on Tuesday. Both benchmarks were up this week by more than $40 from a year ago.

Oil benchmarks settling at prices last seen years ago demonstrate how tumultuous global markets have been in their efforts to attain a profitable equilibrium between supply and demand in a new post-pandemic world that is increasingly focused on the energy transition.

US demand surge

Supporting the price increase are the steady draws on global oil inventories, averaging 1.9 million barrels per day during the first three quarters of 2021, according to the US Energy Information Administration.

In the US, petroleum demand in September reached a record high at 20.6 million bpd, according to the American Petroleum Institute’s (API) Monthly Statistical Report.

Demand is not expected to cool any time soon. The International Energy Agency (IEA) recently forecast that global oil demand will rise by 5.5 million bpd in 2021 and 3.3 million bpd in 2022, when it reaches 99.6 million bpd, slightly above pre-Covid levels.

Supply challenges

Oil supply, however, remains challenged.

In the US, the supply has “remained muted due to the industry’s financial, work force and supply chain constraints, coupled with a lack of policy support,” API chief economist Dean Foreman told Upstream.

The IEA sees supplies rising sharply in October as US output bounces back from Hurricane Ida production shut-ins that took millions of barrels of crude off the market.

However, it also noted that it sees inventories continuing to decline in the fourth quarter of 2021, even with Opec’s output boost of 400,000 bpd.

Opec’s spare capacity will dwindle as it ramps up production, potentially falling to below 4 million bpd by the second quarter of 2022, as compared with a cushion of 9 million bpd in the first quarter of 2021, the IEA said.

“Shrinking global spare capacity underscores the need for increased investments to meet demand further down the road,” the IEA said.

Repairing balance sheets

Where those increased investments will come from is still unclear as the industry looks to capitalise on higher oil prices to rebuild after a difficult 2020.

“We’re not seeing much of an uptick in activity in response to the higher prices right now,” Welligence’s Montgomery said.

“I think companies are still very driven to repair their balance sheets. Last year did a lot of damage and this is an opportunity to get those balance sheets back in order.”

“Companies remain cautious about committing to significant levels of new capital spend. So capital discipline is very much still the name of the game,” he added.

Looking ahead

Montgomery does expect more activity next year, however, especially for projects with quicker potential returns.

“We expect most of the projects that companies chase are going to be short cycle in nature — the projects where they can invest their capital at a level that is not high and see a fast return,” he said. “And that’s partly to take advantage of the high oil prices while they’re here and now.”

Surging oil prices appear to be encouraging more US shale producers to drill new wells, with the latest Baker Hughes count showing the number of rigs targeting oil increasing by 12, to 445.

However, this latest increase is due to oil prices having risen earlier to the $70 per barrel range, according to Andy Hendricks, chief executive for Houston-based land drilling contractor Patterson-UTI Energy.

“In terms of Patterson-UTI’s rig count, we were working about 80 rigs in August. And at the Barclays Energy Conference, I gave an update that said we would be up to 100 rigs in the first quarter, all predicated on $65 to $70 oil,” Hendricks told Upstream.

“Our rig count is growing; we’re in the 80 to 85 rig count range, not including our recent acquisition of Pioneer Energy Services, but that rig count growth is still based on decisions that were made at $65 to $70 a barrel,” he said, adding that there is a delay in the decision process of a couple of months.

“Plus, right now we’re in the middle of most E&Ps’ budget seasons. It slows down the decision process. If oil stays at this level going into next year, then I can certainly see another leg up in the rig count from what we had already projected into early next year.”

Foreman said additional challenges facing US drillers in stepping up activity extend all the way to the White House.

“On top of physical constraints in terms of people, supply chain issues and financial constraints, we also have policy uncertainty now,” he said.

“How do you make long-term investments in natural gas or oil drilling, when the administration is signalling that it really wants to move in a concerted effort away from fossil fuels?”

Source: https://www.upstreamonline.com/finance/another-leg-up-experts-see-oil-price-surge-powering-upstream-activity-in-2022/2-1-1085101