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The oil and gas industry is as close to a real-life soap opera
as you can find, with characters, themes, and narrative arcs.
Clearly, COVID-19 set the scene for the most recent act of the
North American upstream storyline, and two plotlines are now in
motion:
Inflationary pressures which are a counteracting force to oil
and gas prices, which have not been higher in years
The role of private operators in the production landscape, and
how their actions and incentives differ from their publicly traded
peers
The consumer markets have been rife with stories about prices
increasing strongly on everything from rents to cars to groceries.
The go-to explanation for this has been that supply chains are
disrupted or overloaded, and costs are being passed on to
consumers.
Recently though, there has also been a countervailing story that
perhaps it is the expectation of inflation that has become
a self-fulfilling prophecy. In this theory, the companies raising
prices do so because they operate as part of an oligopoly in a
highly concentrated supplier landscape, and quite simply, they
can.
We can reverse this reasoning to establish a view on the
supply/demand balance in the North American upstream market.
Indeed, we can hypothesize that any eventual cost inflation that
comes to the upstream industry should not be seen as only a sign of
recovery from the effects of the pandemic, but also an indication
that the industry is overcoming the issues that weighed heavily
before the pandemic.
In 2019, the North American services market was highly
oversupplied, and so in 2021 and 2022 if services companies can
raise prices, it is because they are comfortable they can do so
without someone else undercutting them to conserve market share,
indicating the market is less diffuse than it was previously.
The "A-list" stars of the upstream industry, the publicly-traded
operators, are expected
to stay the course and give their audience of debt and equity
holders more of what they want to see—that is to say, financial
discipline and maximized cash flows.
Despite the projected steadiness in activity from public
companies, readers of the latest North
America Upstream Spend report will notice that our capex
outlook for 2022 is materially higher than for 2021; this comes
down to the increasing importance of private operators. Although
these smaller organizations have long been seen as the supporting
cast to the leads played by the independent oil companies
(independents) and international oil companies (IOCs), they are now
experiencing their own star-turn. On aggregate, these private
operators are expected to make up a significant portion of activity
and they appear to be chasing production as opposed to financial
discipline.
The narratives in North America are still far from being
resolved, and while there will likely be no cliffhangers for the
end of the year, that's not to say the coming months won't be
"must-see."
For more information on the North America Upstream Spend
report or any of IHS Markit's Upstream Cost & Technology
research, please contact James
Blanchard.
Posted 15 December 2021 by David Vaucher, Associate Director, Cost & Technology, Upstream Consulting, S&P Global Commodity Insights
Since 2021 it has been observed a strong reduction of stacked OSVs. The increasing demand has encouraged companies… https://t.co/TcqJsN4JMp
Jul 05
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