It is the third week in April, and the countryside is in full bloom. It makes one hopeful. It also reminds one that everything in nature is cyclical. So, one must trust, is everything in economics. There will be an upturn in the industry. The issue is — as everyone knows — when.
There are some indications that a recovery may occur sooner rather than later. The problem is that it will be a two-stage recovery, with North America trailing the rest of the world. Several trends would seem to confirm this scenario. First, while revenues in North America, and particularly the US, have declined significantly in both the operators’ and service and supply sector, the same cannot be said in the non-US arena. Take Weatherford International’s first-quarter 2009 report, for example. The company’s first-quarter revenues were US $2,256 million. That is 3% higher than for the same quarter last year. But, while North American revenue declined 23%, international revenue (non-North American) actually increased 28%. A look at the North American rig count versus the international rig count confirms the relative strength of the international market vis a vis the North American market. In the first quarter, the North American rig count declined 27%, whereas the international rig count only fell 2% during the same period.
What is at work here? North America and the international plays are different. North America is a natural gas play with associated oil. The international play is oil with associated gas. Since gas is still, arguably, a regional commodity, North American recovery depends, to a large extent, on a recovery in North American gas prices. Conversely, recovery of the international sector depends on a stabilization and subsequent upward movement in the price of oil.
For North America, recovery of natural gas prices is a tall order. The gas bubble is still with us. However, several pundits in the industry are predicting that gas will take an increasing market share in the power generation sector over the next two quarters. That should be accompanied by increases in demand for gas by the refining and chemical sectors due to inventory replacement and increasing demand related to lower prices. In short, industrial demand for gas seems to have bottomed and should begin a gradual climb. But the issue is more complicated. According to analysis by Pritchard Capital Partners, there is a consensus view that US gas storage capacity and a 15% year-over-year rise in the value of the US dollar will attract more than 2.5 Bcf/d of liquefied natural gas (LNG) to the US market. The balance to the LNG increase will be falling rig count and production leading to deliverability decline of some 3 Bcf/d by year end. That should result in a balanced US gas market sometime in 2010. Until then it will likely be a rocky road with a dim prospect for the beginnings of recovery.
On the international, oil-driven front, recovery could begin as early as the fourth quarter of this year. Elephant-size fields and long lead-time developments have kept non-North American activity at a healthy level. Brazil, for example, has announced a number of high-potential pre-salt discoveries with an attendant 61% increase in its five-year capital expenditures program. And it is on the hunt for an additional 28 deepwater drillships for next year. West Africa activity remains buoyant. With OPEC production cut compliance at better than 80%, a stabilizing oil price, no international gas bubble, a fairly healthy market compared to North America, and rising demand built on an improving economic picture, recovery in the international sector should lead North American recovery by six months to a year.
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