Volatility continued to impact oil and gas markets in 2018. The industry was marked the US claiming the title of world's top oil producer, in part to the boom we continue to see in the Permian. But, Q4 also saw oil price declines causing economic concerns. Our experts talk about these and other trends from 2018 and provide us with a look ahead at the oil and gas market in 2019. Listen to the full podcast for details. Here's an excerpt from the conversation:

Jessica Nelson:

2018 was quite an interesting year for the oil and gas sector. This year the US claimed the title of world's top oil producer-in part to the boom we continue to see in the Permian. Now, as 2018 ends, North America oil production continues growing aggressively, gas price is finding new support, and there appears to be plenty of capacity in North America oilfield services. Reed, start us off. Looking forward to 2019, do you expect our attention to continue to be focused on oil supply and, more specifically, activity in the Permian Basin?

Reed Olmstead:

Yeah, I think that really in 2019, it's going to continue to be a story of the Permian Basin. Over the last couple of years, the Bakken and the Eagle Ford have turned into a harvest plays almost where activity levels are pretty stagnant.

The production stays relatively flat and operators are leveraging those as cash-producing assets. So, the growth is really in the Permian Basin. Now, it's interesting how the dynamics there work. We've seen constraints and some interesting ways of dealing with the constraints.

One of the ones that we've noticed is drag-reducing agents in the pipelines to where some of these pipelines out there actually operating above nameplate capacity. We're also starting to see some other constraints that will play in. But this year, like you said, it's been huge. We're looking at nearly 2 million barrels a day of growth and probably in 2019 we're going to look at about 1.2. But the dynamics of how that comes into play has shifted a bit because we've seen operators not looking at the Permian Basin to complete wells. Certainly not in the first half like we were originally expecting.

We've got this thing, and David can probably address this better than me, the frac holiday we've been seeing in the Permian Basin. It is really impacting how we see volumes coming to market in 2019 and into 2020. David, could you talk us through that a little bit?

David Vaucher:

Thanks Reed. The term frac holiday is a little bit misleading because it implies that it's entirely up to the frac companies to take themselves out of the market. But, really what we've been seeing is that for the past couple of quarters, there's certainly been some softening in the Permian, which is really what's driving the activity.

I mean, what we're seeing just in the last couple of weeks, is nothing new. Anytime there's an upcycle there tends to be an overshot of capacity coming online. When you have an upstream oversupply and then a downstream bottleneck that just creates excess pumping of horsepower in the market.

The frac holiday is people are sort of waiting to see what comes up in 2019 with the pipelines opening up. But, there's certainly been a lot of activities taken away from individual service companies because of this oversupply.

In terms of how this plays out really, just to kind of start off on the insights for 2019, I know that Reed has been through a refresh of assumptions given what's happened recently and so hopefully you can share that with the listeners. But, I think the key question for us on the horsepower side is, how do service companies play this? I mean, they can either try and be aggressive and capture as much of these DUCs coming online as possible, but then they run the risk of over committing themselves or they can perhaps pull back and then they risk losing some potential upside there.

So, strategically how will service companies balance the oversupply with how they want to commit themselves. That's one of the key things we're going to be looking at in 2019.

Jessica Nelson:

You talked a little bit about the frac holiday. I know news recently has talked about some of the sand mine closures. I assume all this is putting more downward pressure on oil field services, which I think you've told us before is already experienced lower demand for services this year. How will this impact the oilfield services sector?

David Vaucher:

If you look at the research that we do, which is for the actual upstream commodities and services themselves, so pumping and proppant, in this particular case. There is a lot of supply out there. I mean, sand mines and as you said there are closures, because there is so much supply already pumping. We know that there is oversupply.

The actual bottlenecks are on getting those services and supplies to the wellhead on time. So that would be what they call last-mile trucking solutions for proppant. And, then just simply roads. I mean, when Reed and his group come up with estimates for how much pipeline capacity is coming online and we come up with estimates for, okay, how much horsepower is available to frac these wells and then fill those pipelines?

I think the thing that gets missed because it's very hard to quantify, is that there's an operational and infrastructure risk. In other words, you can have enough horsepower. Let's say you need 10 crews, right? But, if you only have enough roads to get five crews to wellheads, effectively you've got 50% utilization there and you're going to miss your production target.

I think the issue is that we're going to see going ahead is likely continued pressure on the North American market. Certainly in the first half of the year. I think some of that pricing power will come back to pumping companies if in fact there is this surge in demand from the DUCs, but there is also going to be a continued sort of infrastructure risk in terms of labor, infrastructure, roads and then power. Things like that. So it's very necessary to separate the commodities themselves from all the other supporting foundation that it takes to get those commodities to the well site.

Hear additional insights about supply constraints, as well as how the gas market will play into 2019 by listening to the full podcast.

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Posted 2 January 2019

This is an excerpt from Upstream in Perspective and has been professionally transcribed as accurately as possible. Please note, some words and phrases may have been unintentionally excluded.

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.