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North American Upstream Spending Report - Q2 2021
The effects over the past 18 months of the global pandemic have been unprecedented for anyone alive to experience it. Thanks to the deployment of vaccines in the United States and Canada, North America seems to be at the tail end of this particular time in history, but now it is becoming apparent that just as no one could have predicted how the pandemic would unfold, and its after-effects are just as surprising.
After nearly a year and a half of suppressed demand, the newly vaccinated are eager to travel and consume, which has led to rapid price increases in housing, building supplies, and microchips, among other products easily taken for granted prior to the pandemic. It is too soon to say whether or not these inflationary pressures are here to stay, but operators and service companies will nevertheless have to take them into account for the time being.
For operators, increased consumption and travel mean higher oil prices, and indeed they find themselves in a very positive set of circumstances, with WTI currently holding close to $65/bbl and service costs remaining low owing to a still oversupplied market. Service companies may benefit from some increase in activity as North America emerges from the pandemic, but the increased costs of fuel and other inputs could eat into the margins it is still fighting to reestablish. Operators have spoken about establishing partnerships with their service providers. We will see shortly how eager they are to follow through with actions to absorb some of those cost increases.
Other notable trends and findings this quarter
- We have lowered our outlook for North American E&P capex from last quarter's update, but the year-over-year rates of growth for the first half of the decade are still strong (roughly 21% from 2020 to 2021 and 34% from 2021 to 2022).
- President Joe Biden continued to break sharply from his predecessor's policies, which heavily favored the upstream industry, when he announced that the United States would rejoin the Paris Accord and pledged to cut carbon emissions by 50% by 2030 (relative to 2005). Operators should anticipate future legislation to drive action toward the targets, although it is uncertain what shape this will take.
- Operators also continue to be highly disciplined with respect to capital. For publicly held companies, this reflects a cost benefit analysis that the increased revenue from oil prices (which we presume to be currently greater than those used for budgeting) is not worth the penalty paid from a presumed loss of equity imposed by shareholders that will select other operators more likely to prioritize cash flow over production.
- Pipeline issues have for years had a significant impact on the state of the upstream market, in both the United States and Canada. Counterintuitively, these stories have always been in the undercurrent, taking a back seat to what could be termed more "exciting" issues affecting upstream at a given moment, such as geopolitics. That changed this quarter when Colonial Pipeline was hit by the largest industrial ransomware attack in history. This issue has been resolved, but the millions of dollars paid to the perpetrators sets a precedent that we should expect similar events in the future.
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