North American service cost increases expected against an uncertain global backdrop.

COVID-19 counts are down and restrictions in North America are being lifted. From a public health perspective this is excellent news, but this improvement is exacerbating pain points from an economic perspective. Supply chains that were already stressed will continue to be so; rising oil prices that could be further impacted by the recent geopolitical events will contribute to inflationary pressures in the broader economy, which will then be felt at the wellhead.

These acute, momentous events are occurring at the same time that operators and service companies are attempting to navigate the energy transition. This momentum has the potential to alter supply chains further as well service companies adapt to new client demands by adding new services and perhaps dropping existing ones.

In the meantime, after a year spent speculating about well services cost increases, with some hindsight it is possible to affirm that operators will have to get used to seeing increases: the North American Unconventional Onshore index is projected to increase at a double-digit rate in 2022.

PLEASE NOTE: This report was prepared prior to the invasion of Ukraine. Given how starkly this has affected the markets, the findings in this publication do not reflect the present state of affairs and do not fully cover our long-term view of North American operations. Future publications of this report will account for our latest findings based on the geopolitical ramifications of current events.

After the appearance in late 2021 of the Omicron COVID-19 variant, the world braced itself for the effects of this more contagious virus. While Omicron continues to affect people, case counts are now down and restrictions in North America are being lifted. From a public health perspective, this is excellent news, though perhaps paradoxically, this improvement is going to exacerbate pain points from an economic perspective.

Supply chains that were already stressed will continue to be so. Rising oil prices that could be further impacted by the recent geopolitical events will contribute to inflationary pressures in the broader economy, which will then be felt at the wellhead.

Turning now to more specific upstream findings for this quarter:
• These acute, momentous events are occurring at the same time that operators and service companies are attempting to navigate the energy transition. Momentum that picked up in 2020 continued through 2021, with about 65% of the IHS Markit Company Research Large and Midsize North American E&P peer group establishing greenhouse gas emissions targets for 2024-30 that were more specific than before. This momentum has the potential to alter supply chains further as well service companies adapt to new client demands by adding new services and perhaps dropping existing ones.

• From a spending point of view, high oil prices and demand that is well above pandemic lows have contributed to an upstream spending forecast that is projected to increase materially over the next few years. Indeed, North American E&P capex is projected to increase every year through 2026, from USD122 billion in 2021 to USD221.8 billion in 2026.

• After a year spent speculating about well services cost increases, with some hindsight it is possible to affirm that operators will have to get used to seeing increases: the North American Unconventional Onshore index increased just over 7.5% in 2021 and is projected to increase at a double-digit rate in 2022.

• While operators are expected to have less buyer power going forward, they should be able to mitigate this by reaping the rewards of the work they have put in constantly to improve their operational efficiencies. While it would be reasonable to assume that gains stopped years ago, given how long operators have been present in all the major US plays, in fact, rig efficiencies increased between 10% and 25% over 2020 and 2021 for many of these plays. Furthermore, producers in the Delaware Basin and Appalachia increased productivity by 10-15% by drilling longer laterals.

The 'North American Upstream Spending' full report is available to our Connect subscribers.

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Posted 08 April 2022 by David Vaucher, Associate Director, Cost & Technology, Upstream Consulting, S&P Global Commodity Insights

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.