The above analogy arose during Hart Energy’s Offshore Executive Conference in Houston, which I was honored to host. It focused largely on the current state of the Gulf of Mexico, and there were regular comparisons with its young upstart North American unconventional cousin.

James K. Wicklund, managing director, research at Credit Suisse, iterated how the industry is now experiencing an economic curve akin to “skating along the bottom of the bathtub.” His reasons are sound:
• Oil production from nine of the world’s largest producers rose a combined 8% in the first nine months of 2015 to more than 10 MMbbl/d;
• OPEC production is up more than 1 MMbbl in the last year;
• Iran thinks it can raise oil production by 800,000 bbl/d;
• Russia is producing full out (with a devalued rouble helping out);
• The North Sea will see its first production growth in 15 years;
• Brent was $115 for 3.5 years, with that reinvestment slowing decline; and
• The U.S. grew oil production in 2014 by 1.3 MMbbl/d.

Taking the bathtub profile further, Wicklund said that when the industry finally starts to climb back up—which it will—it will be led by onshore drilling.

This is due to onshore’s “immediate gratification,” as he described it—fast, fun, with a “gold rush” mentality, lots of opportunities, driven by a faster cash return cycle, diverse activity base, and the ease of logistics and infrastructure. “It’s what everyone is focusing on,” he said.

Offshore, meanwhile, with its queue of delayed and deferred projects and spending as well as longer cycle times and logistics, also will recover—but later.

Wicklund’s point is that the U.S. has become the world’s swing producer. The reality is that while the global oil markets might and likely will come closer into balance in 2016, that doesn’t necessarily mean a sudden spike in prices or activity. “We are the swing producer now, and that means if the world is oversupplied, we take the hit, and if the world is undersupplied, we rev up the U.S. shale machine to provide the balance.”

This changes the very role that the oil price plays in the market—a remarkable state of affairs.

“The ‘collateral damage’ to global conventional production accelerates its decline and increases the call on U.S. shale over time. It forces a change in behavior across the industry as it adjusts to the new and likely lower role of the oil price,” he said.

Like he told our audience, “2015 has been a heck of a ride.” So hold onto your hats in 2016.

Contact the author, Mark Thomas, at mthomas@hartenergy.com.

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