A growing trend toward longer laterals in North America and use of subsea tiebacks could pave the way to profits for Schlumberger (NSYE: SLB) as the oil and gas industry emerges from the downturn.
The oilfield services company is betting on technology such as its “rig of the future” to lead the way, including in the U.S. where drilling activity and rig counts are increasing. Operators are tackling longer horizontal laterals, or “super laterals” as Schlumberger CEO Paal Kibsgaard called them, to increase reservoir contact in an effort to produce more oil and gas.
During the company’s third-quarter earnings call Oct. 21, Kibsgaard said the company drilled a well with a record lateral length of 18,500 ft for Eclipse Resources Corp. (NYSE: ECR). The Utica Shale well was drilled in less than 18 days using a combination of drilling technologies—including Schlumberger’s PowerDrive Orbit powered rotary steerable system for optimized directional drilling—in a one-bit run. The super lateral cut costs by lowering the number of required horizontal penetrations, Schlumberger said.
“This trend is already creating significantly higher demand for our unique drilling technologies and we are at this stage sold out for PowerDrive Orbit and in the process of adding further capacity from overseas and from manufacturing,” Kibsgaard said.
E&Ps continue looking for sustainable cost-savings while the sector rebounds from a profit-crushing downcycle. Oil prices are holding above $50 per barrel, far from the lows of the upper-$20s earlier this year, giving operators the confidence needed to ramp up drilling activity.
“In the global oil market, the supply and demand of crude is now more or less balanced as evidenced by flattening petroleum inventory levels and the start of consistent draws toward the end of the quarter—particularly in North America,” Kibsgaard said in a statement. “At the same time, oil demand for 2017 was again revised upward in October and if combined with OPEC’s announced intention to cut production, this suggests further inventory draws in the coming quarters that should lead to upward movement in prices.”
Schlumberger’s North America land revenue for third-quarter 2016 rose by 14% compared to the second quarter. Overall, net profit attributable to Schlumberger—which added Cameron International Corp. as its fourth group in April—dropped to $176 million in the third quarter compared with $989 million a year earlier. Revenue fell 17% to about $7 billion.
Schlumberger anticipates growth in 2017 in the Middle East, Russia and the North American land market, where Kibsgaard noted there are stronger collaborations among shale players on the drilling side.
“We believe technology will play an even larger role in the North American land market,” he added.
The drilling technology trend playing out today in shale basins across the U.S. could also attract E&Ps to Schlumberger’s new “rig of the future” land drilling system.
Two first-generation pilot versions of the rigs will be operating in West Texas in the fourth quarter of 2016; however, the pilots won’t have all of the features of the new rig system, which will be rolled out in 2017, Kibsgaard said.
Strong growth in the North American land drilling market has prompted Schlumberger to shift its focus from “maintaining presence to now gaining market share,” he added.
The same is not the case for the hydraulic fracturing market, where there has been a surge of drilling activity with stage counts up 17% sequentially and E&Ps starting to drain DUC well inventory.
“The significant increase in sand volume pumped per stage is already starting to create inflation on both product and distribution costs, which will further obstruct and delay the hydraulic fracturing industry’s path toward restoring profitability,” Kibsgaard said.
The company will deploy its stacked capacity on short notice only when there are positive impacts on earnings, he said. He described the fracturing market as oversupplied with a “large number of very hungry players.”
Offshore, with the added experience brought by the Cameron Group and OneSubsea, focus will be on subsea tiebacks, which Cameron Group President R. Scott Rowe sees as an area of growth for the subsea sector.
“Operators are looking to spend significantly less and drive higher returns by capitalizing on existing host facilities,” Rowe said. “OneSubsea is uniquely positioned with our standardized subsea tree, our single well boosting system, our unified control system and our partnership with Subsea 7 to capitalize on this growth opportunity.”
Currently, OneSubsea has eight paid FEED studies. Hopes are that by year-end 2016 the group will secure a small subsea tieback award that uses OneSubsea equipment and Subsea 7’s installation capacity, he added.
Like other areas of the industry, the subsea sector has been impacted by the downturn as customers revise or delay projects or schedules. Rowe said deep water has continued to be challenged, with five more rigs stacked in the third quarter and deepwater rig utilization down to 55% in September. He expects tree awards this year will be less than 100.
“Our focus has shifted to the tieback market and we do see a lot of opportunities on that,” Rowe said.
With a standardized subsea tree that reduces costs, a single well boosting, a unified control system and installation from Subsea 7, “we think we’ve got a very economical package to tie back one or two wells into existing host facilities.”
Velda Addison can be reached at email@example.com.
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