North American upstream activity remained sluggish through the first half of the year, with little optimism things would change before 2025, according to an industry survey.
Evercore ISI conducts two global spending surveys each year to check the temperature of the natural gas and oil market. An increasing focus on energy security and reliability drove global upstream spending through June.
However, U.S. and Canadian exploration and production (E&P) companies have reduced capital expenditures (capex) more than was forecast last December.
The “fundamentals of upstream spending remain strong in international and offshore markets,” said Evercore’s James West, who oversaw the survey. North American activity is struggling, though.
North American capex this year now is forecast to dip overall by 3%. That “represents a significant deceleration of 487 basis points compared to the 2% growth projected in our December 2023 survey.”
In total, global upstream capex this year is now forecast to rise by 3% from 2023. That’s down from a 5% growth forecast in December. Most of the decline was traced to the North American pullback.
Lower 48 ‘Listless’
The U.S. land market “remains listless, albeit at good margins,” West said. The “impact from customer consolidation and weak natural gas prices continues to be felt in the U.S. land market.”
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One telltale sign is in the U.S. natural gas drilling rig count. For the week ending Friday (July 12), the domestic gas rig count fell by one to 100, according to updated Enverus and Baker Hughes Co. data. The combined domestic rig count also slipped by one to 584.
Meanwhile, in the pressure pumping sector, Primary Vision data indicate that the active fracture (frack) spread count averaged 251 in the second quarter versus 255 in the first quarter, West said. “The frack spread count declined before the rig count did.”
On the positive side, respondents to the survey anticipate “some recovery in the U.S. land market as we move into 2025.”
The executives cited the “combination of attractive oil prices, the end of the integration process for the major E&P mergers that have unfolded in the last 18 months” and the expected growth in gas demand “due to under-construction LNG export capacity moving to commissioning and ultimately exports.”
‘Drastic Shift’ By Independents
The decrease in North American spending primarily comes from a pullback by the U.S. independents, responsible for around two-thirds of overall spending. While Canadian E&Ps are forecasting a 3% increase in capex for the year, that also is down from 8% growth in 2023.
“Compared to our initial survey, we noted a drastic shift in our growth estimates for 2024 in our mid-year survey,” the Evercore analysts said. “We had anticipated growth for majors and independents to stay flat year/year for 2024.
One of the shifts in spending was traced to the merger and acquisition (M&A) frenzy among the U.S.-based E&Ps. The M&A dealmaking has led to more consolidation along with more efficiencies, creating an opening to cut overhead.
The latest mid-year survey now suggests that capex for majors working in North America would increase by 12%, while spending by the independents “will decrease by 11% in 2024.”
Oil prices should continue to see support as consumption rises worldwide, along with “geopolitical constraints and OPEC’s prudent supply decisions,” West noted.
The outlook for natural gas prices – particularly in North America – is more complex.
Benchmark Henry Hub gas price forecasts have been “relatively subdued over the past decade.” As Lower 48 E&Ps moved from the gas fields to the oilfields, they pulled in a surfeit of associated gas. Consequently, “gas price expectations have generally shifted downward since mid-2018.”
Multiple events also have created volatile U.S. gas prices over the past two years, West said. They include a slower economic recovery in China, along with “a warmer-than-expected winter, egress constraints and the buildup of inventories in the U.S…” Those factors “ended consecutive years of robust Henry Hub prices...”
For example, NGI’s Daily Historical Data show natural gas prices at the national benchmark hub have averaged $2.114/MMBtu through Thursday (July 18). Through the same period last year, Henry Hub trades had averaged $2.409. Henry Hub had a mean price of $6.072 through mid-July 2022 in the fallout of the Russia-Ukraine war.
West noted that Henry Hub has trended around the $2.70 mark this year. “The average gas price basis for 2024 E&P capex budgets is down 13% from the $3.10 average in our initial 2024 outlook.
“With the exception of gas prices bouncing above $4.00 in 2010, 2011 and 2022, gas price expectations mostly remained in a tight $2.00-3.00 band over the past decade.”
According to the E&P operators responding to Evercore’s survey, the threshold for increasing gas-directed capex ranges from a low price of $3.00 to a high price of $10.00. NGI data as of Friday have forward fixed prices for Henry Hub averaging $3.219 for the winter 2024/2025 strip.
That said, the “majority of operators will not increase their spending plans for the second half of 2024.”
There appears to be “slightly more downside risk for gas-directed than oil-directed capex,” the Evercore analysts said.
The gas storage inventory build, coupled with warmer-than-expected weather, has taken a toll on U.S. prices, West noted.
However, “we believe the importance of natural gas will gradually increase throughout the decade as natural gas continues to solidify as a transitory fuel in the energy transition and bolster energy security.”
The Evercore analysts said there is likely to be “limited upside to natural gas prices in 2024, although 2025 looks a lot more promising.” They expect the Biden administration’s pause on worldwide permits for liquefied natural gas exports “will likely be lifted,” West noted. U.S. Department of Energy Secretary Jennifer Granholm has suggested that the deferral on permitting could be over by year’s end.
Several North American LNG export projects, greenfield facilities and expansions that were in the works before the pause are scheduled to come online into 2025.
