US private-equity investors are pushing shale growth and this has “spooked the oil markets” into thinking incorrectly that oil inventories will remain high, says Schlumberger chief executive Paal Kibsgaard.
This perception, created by US investors chasing short-term gains, is actually preventing the markets recovering and the oil price from rising, he says.
Kibsgaard expects “clear reductions” in the global oil inventories from the second quarter, which will inject positive market sentiment.
He said: “A sustained growth in demand continues to provide a much-needed foundation for the outlook, leaving little reason for concern over this part of the oil market equation.
“The supply side, however, is far more complex with market nervousness and investors’ speculation generally overshadowing facts and physical fundamentals leading to unpredictable movement in oil prices in spite of a third year of global underinvestment.”
In explaining the relevance of US shale, Kibsgaard breaks world oil production into three main blocks. These are Opec and Russia with a 40% share of global production, the rest of the world with about a 50% share and US land with an 8% share.
Kibsgaard says the 40% block of producers are committed to “a sound and consistent stewardship” of their resources, are being selective on investments and are actively seeking to rebalance production.
The 50% block, which includes national oil companies and majors, continue to limit their investments severely in new oil and are doing so to meet cash returns for shareholders, he adds.
Combining these two blocks means about 90% of the world’s oil producers are now pushing to rebalance supply, although for different reasons.
The US land block is aiming for quick barrels, which has spooked oil markets into thinking inventories will remain high and this has had a negative impact.
“The production level from the US land E&P [exploration and production] companies is largely driven by the US equity investors who are encouraging, enabling and rewarding short-term production growth in spite of marginal project economics,” Kibsgaard said.
“The fast barrels from US land are facilitated by a factory approach to both drilling and production and supported by a rapidly scalable supplier industry with a low barrier to entry.
"In this market, the pursuit of equity appreciation outweighs the lack of free cash flow, net income and return on capital employed for both E&P companies and the service industry.”
In short, those producers with 8% of the global supply will not be able to keep inventories high, when those with 90% of supply are actively moderating production.
Schlumberger turned in a second-quarter net loss of $74m, which compares with a net profit of $279m in the first quarter of this year and a huge net loss of $2.2bn in the second quarter of 2016.
Earnings per share was $0.35, excluding charges, for the quarter. Overall revenue rose to $7.5bn, up 8% from $6.9bn in the preceding quarter of this year and $7.2bn in the same quarter last year.
North American land-based activity was especially strong, with revenue rising 18% from the previous quarter. In shale, hydraulic-fracturing revenue increased by 68% sequentially.
For offshore, Schlumberger says North Sea activity was “strong” for the UK and Norway areas, after rig counts increased for summer exploration work.
The company says it sees some early signs of offshore restarts for African projects. Latin America revenue rose on Mexican and Colombian work, while Brazil remained weak. Activity in Egypt, Iraq and the United Arab Emirates "remained solid”, it says.
