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Apr 08, 2022
North American service cost increases expected against an uncertain global backdrop.
COVID-19 counts are down and restrictions in North America are
being lifted. From a public health perspective this is excellent
news, but this improvement is exacerbating pain points from an
economic perspective. Supply chains that were already stressed will
continue to be so; rising oil prices that could be further impacted
by the recent geopolitical events will contribute to inflationary
pressures in the broader economy, which will then be felt at the
wellhead.
These acute, momentous events are occurring at the same time that
operators and service companies are attempting to navigate the
energy transition. This momentum has the potential to alter supply
chains further as well service companies adapt to new client
demands by adding new services and perhaps dropping existing
ones.
In the meantime, after a year spent speculating about well services
cost increases, with some hindsight it is possible to affirm that
operators will have to get used to seeing increases: the North
American Unconventional Onshore index is projected to increase at a
double-digit rate in 2022.
PLEASE NOTE: This report was prepared prior to the
invasion of Ukraine. Given how starkly this has affected the
markets, the findings in this
publication do not reflect the present state of affairs and do
not fully cover our long-term view of North American operations.
Future publications of this report will account for our latest
findings based on the geopolitical ramifications of current
events.
After the appearance in late 2021 of the Omicron COVID-19 variant,
the world braced itself for the effects of this more contagious
virus. While Omicron continues to affect people, case counts are
now down and restrictions in North America are being lifted. From a
public health perspective, this is excellent news, though perhaps
paradoxically, this improvement is going to exacerbate pain points
from an economic perspective.
Supply chains that were already stressed will continue to be so.
Rising oil prices that could be further impacted by the recent
geopolitical events will contribute to inflationary pressures in
the broader economy, which will then be felt at the wellhead.
Turning now to more specific upstream findings for this
quarter:
• These acute, momentous events are occurring at the same time that
operators and service companies are attempting to navigate the
energy transition. Momentum that picked up in 2020 continued
through 2021, with about 65% of the IHS Markit
Company Research Large and Midsize North American E&P peer
group establishing greenhouse gas emissions targets for 2024-30
that were more specific than before. This momentum has the
potential to alter supply chains further as well service companies
adapt to new client demands by adding new services and perhaps
dropping existing ones.
• From a spending point of view, high oil prices and demand that is
well above pandemic lows have contributed to an upstream spending
forecast that is projected to increase materially over the next few
years. Indeed, North American E&P capex is projected to
increase every year through 2026, from USD122 billion in 2021 to
USD221.8 billion in 2026.
• After a year spent speculating about well services cost
increases, with some hindsight it is possible to affirm that
operators will have to get used to seeing increases: the North
American Unconventional Onshore index increased just over 7.5% in
2021 and is projected to increase at a double-digit rate in
2022.
• While operators are expected to have less buyer power going
forward, they should be able to mitigate this by reaping the
rewards of the work they have put in constantly to improve their
operational efficiencies. While it would be reasonable to assume
that gains stopped years ago, given how long operators have been
present in all the major US plays, in fact, rig efficiencies increased between
10% and 25% over 2020 and 2021 for many of these plays.
Furthermore, producers in the Delaware Basin and Appalachia
increased productivity by 10-15% by drilling longer laterals.
The 'North American Upstream
Spending' full report is available to our Connect
subscribers.
For details on our research offerings visit Upstream Costs & Expenditures.
This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.
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