Global energy security concerns likely drive supply expansion, diversification: Schlumberger CEO

Concerns over energy security as a result of the ongoing Russia-Ukraine war may spur capacity expansion and diversification of oil and natural gas supplies in the next few years, which could prompt more longer-lead projects which industry has shied away from in recent years, the top executive of oil services giant Schlumberger said April 22.

A half dozen years of oil prices that hovered around $45/b-$50/b beginning in 2015 eventually led upstream producers to focus on so-called short-cycle projects that provided a relatively quick payback starting roughly six to 24 months after being greenlighted.

But longer-cycle, pricey projects that take years or even a decade to produce first oil could also make a comeback as the thirst for supply diversity and security become major priorities for upstream producers, Schlumberger CEO Olivier Le Peuch said during his company's first-quarter 2022 earnings conference call.

"This new dimension will have long-lasting positive implications for energy investments over the next few years," Le Peuch said.

Energy security that drives further capacity expansion and demand for more diverse oil and gas supply will also support additional long-cycle development projects, exploration activity, and brown feed regulation programs, he said.

Long-cycle projects include offshore and large-capacity onshore expansions that national oil majors continue to develop. In the Middle East, a few countries have already committed to capacity expansions this year and beyond.

And "offshore you have seen some [final investment decision] approvals," Le Peuch said. "You have seen some exploration drilling resuming even last quarter that would turn into FID and into a subsea and deepwater activity uptick in the second half and further in 2023."

'Evolution' in the energy landscape

The past few months have seen an "evolution" in the energy landscape after Russia threatened, then attacked, Ukraine earlier this year, Le Peuch said.

For one thing, crude prices that shot up this year to more than $100/b from the mid-$70s/b mostly owing to those countries' ongoing war, have created "favorable conditions" for oilfield services and equipment pricing improvement, even as demand for them expanded globally, he said.

"This [pricing improvement] will be a defining characteristic of this upcycle," Le Peuch said. Moreover, higher service/equipment pricing is "absolutely critical" to support oilfield service/equipment providers' financial returns and investments in capacity needed to deliver on both the short- and long-term oil and gas supply the world needs."

Ongoing short-cycle investments in the US are being led by private producers which domestically account for over 60% of the country's land rig count, and that volume is growing amid a "gradual" increase by public operators, said Le Peuch. At the same time, supply chain and capacity bottlenecks hinder growth somewhat, as does exploration-and-production capital discipline, which began to take hold in E&P operators' corporate strategies even before the coronavirus pandemic set in during early 2020.

Le Peuch's comments echo and expand on remarks made earlier in the week by his counterpart at peer oilfield services/equipment giant Halliburton.

Similar to Le Peuch, Halliburton CEO Jeff Miller said supply dynamics have "fundamentally changed" because of investor return requirements, public ESG commitments, and regulatory pressures that make a commitment to longer-cycle projects difficult for operators.

Drawbacks of long-cycle projects

The nature of long-term projects prevents a quick response to market price signals and results in oversupply, whereas short-cycle projects create "a perpetual threat of undersupply" that supports commodity prices, he said April 19.

Miller foresees an industry over the next several years characterized by short-cycle upstream projects, development rather than exploration, and tiebacks to existing production hubs over costly, time-consuming new infrastructure builds—all of which give operators more flexibility to make timely and appropriate investment decisions.

Once long-cycle projects begin, investment must continue and production cannot quickly respond to market price signals, resulting in market oversupply. The pivot to short-cycle barrels creates the opposite effect, a perpetual threat of undersupply that supports commodity price, he said.

But given that backdrop, some intriguing questions emerge, according to Evercore ISI analyst James West.

"We think there will be some interesting choices ahead as inflation and higher activity levels drive further price increases," West said in an April 21 investor note. "Do operators continue to pay higher prices to get their preferred equipment and well construction/completion designs or do they alter those designs potentially sacrificing efficiencies for lower pricing?"

"Some examples would be using a Tier II diesel frac spread, an older, smaller AC rig, and welded instead of seamless pipe," he said.

Schlumberger earned $5.9 billion in revenue during Q1 2022, down 4% sequentially but up 14% year on year. The sequential drop came largely from international operations – including impacts on Russian operations and seasonal weather events – which earned $4.63 billion, down 5%, while North American revenues were flat at $1.28 billion.In Q1, Schlumberger suspended new investment and technology deployment to its Russian operations, Le Peuch said.

Schlumberger's Q1 net income was $510 million or 36 cents/share, down 14% sequentially but up 70% year on year.

"Internationally, short-cycle investments are set to accelerate with the seasonal rebound in the second quarter and more strongly in the second half of the year, led by the Middle East and the key international offshore basins," Le Peuch said.