A new upcycle beckons as oil-advantaged North America gets ready to grow again

Ready Reset, Grow: the North American oil industry

Despite current soft oil prices, the North American onshore environment is on a quiet trajectory to regain strength alongside a revitalized industry chastened from the hard lessons of the past few months.

In the latest installment of a global oil and energy webcast series, IHS experts struck a note of optimism for what lies ahead, outlining the broad contours of a "new world" anchored by a resurgent North America. The details of their analysis can be found in the presentation called "Restructuring North America's Shale Industry."

"As before, companies now will face the same strategic questions-how much to spend, how much to exploit, what the right balance sheet should be-but they will also be proceeding with more caution this time, cognizant of the pain brought on by the current downturn," said Raoul LeBlanc, managing director at IHS Energy.

In particular, oil prices are likely to stay in the $50-$70 range in the short and medium term, LeBlanc noted. However, pricing equilibrium can only be maintained in the face of four conditions.

First, the oil industry must continue to exploit already derisked oil plays. The intensive derisking process of the past five years has created a sufficient inventory of drilling locations to grow supply for several years, and no additional plays are expected to emerge unless prices rise.

Second, service-sector utilization must remain low enough in order for current discounts to continue. Historically, service companies acquire pricing power when utilization exceeds 85-90%, with escalating well costs pressuring oil and gas prices in turn. Given the slow erosion rate of service-sector capacity via retirements and deterioration, companies must wait on demand for rigs and wells to rebound.

Third, global oil supply must not suffer any major disruptions, even as demand growth remains moderate and keeps the annual call on North American output below 750,000 barrels per day (b/d). Accelerating US oil demand growth beyond that threshold will require record activity levels and cash flows to be in place by 2020, which would put enormous strain on the American oil industry.

Fourth and last, if the long-standing ban on US oil exports starts to lift, the United States would then be able to export oil in "meaningful" quantities.

Even so, the four conditions are increasingly less likely to prevail beyond 2016 as the market continues to evolve, IHS analysts concede. The result will be an upward pressure on oil prices starting next year as supply and demand begins to rebalance.

Still, a new map of world of oil is unfolding-one marked by greater operating competence in the oil fields; where capital will be more efficiently deployed by next year compared to the start of 2015; and with overall activity projected to increase again as oil prices rebound in the latter part of this decade. While financial returns will continue to be mixed, the new goal to seek out higher-quality wells with improved productivity to form more valuable portfolios will remain.

And unlike the previous rounds of either underinvestment or a supercycle of activity, the next upcycle will see companies putting a cap on further exploration in favor of maximizing the development of already discovered resources. All told, the financial market currently prefers onshore North America over other global regions for upstream investment, occupying an advantaged position thanks to adaptability, while still providing cover for strong international and offshore projects.

For E&P companies, which valued innovation and growth during the supercycle of the last 14 years, the key to outperforming rivals will hinge on how they squeeze hard-won margins through meticulous cost containment. Such skill sets will be more important than, say, cash-generating abilities or speed of learning.

Learn more about IHS North America Performance Evaluator and Company and Transaction Research.

IHS Staff Writer, May 21, 2015

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.