Schlumberger Chief: Drilling Recovery “Is On Its Way in All Markets”


Drillers will have to begin pouring cash back into oil fields around the world by the end of the year to prevent a global oil-production shortage in coming years, the CEO of Schlumberger said Friday.

That’s why the world’s top oil field services company is gearing up for a global recovery in oil and gas drilling. In a bid for higher service prices, the company recently began renegotiating contracts for hydraulic fracturing and directional drilling technology in the United States, one of the first signs of a new investment cycle in the oil industry.

“The recovery is on its way in all markets,” Schlumberger chairman and CEO Paal Kibsgaard said in a conference call with investors. “The main challenge is going to be to reverse the effects of several years of global E&P under-investment and then mitigate the impending supply shortage we see unfolding.”

The two-year oil bust stopped energy companies from approving dozens of big projects that would have kept international oil production afloat in coming years. But outside of the Persian Gulf, most countries are depleting their reserves without replacing the oil barrels they produce.

“It’s equivalent to borrowing barrels from the future,” Kibsgaard said. Even a burst of drilling in U.S. shale plays couldn’t reverse the trend in oil production, he said, as it still represents only 5 percent of global output. Apart from a seasonal slowdown in the first quarter, oil and gas activity should steadily increase this year as crude prices rise, he said.

“The future supply challenges can only be addressed by a broad increase in global investment,” he said, though he acknowledged the recovery in international markets will be slower than revived drilling activity in U.S. shale plays.

Surveys show U.S. drillers expect to increase spending by nearly a third this year, particularly in the lucrative Permian Basin in West Texas. That, Kibsgaard said, should lead to a long overdue recovery in prices for service company contracts for drilling and pumping oil. Oil field service companies gave producers steep discounts during the worst of the oil bust, allowing drillers to break even at lower oil prices.

“We have active pricing discussions with all customers (in the United States) at this stage,” Kibsgaard said, adding the contract negotiations will continue into coming quarters.

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Schlumberger, he said, has already seen prices pick up for its steerable rotary drilling system designed for unconventional U.S. shale oil fields. It sold out of these systems in the third quarter, and even after adding equipment capacity in the last three months of the year, it remained sold out of these systems in the fourth quarter. Prices have also risen for hydraulic fracturing equipment used to blast payloads of water, sand and chemicals underground to break apart shale rocks.

Still, he added, “we need significantly more pricing before we get into a sustainable operating environment.”

Schlumberger posted a net loss in the fourth quarter as it paid charges related to job cuts, facility closures and other impairments.

It said it lost $204 million, or 15 cents a share, in the fourth quarter, compared to a loss of $1 billion, or 81 cents a share, in the same October-December period the year before. Its revenues fell from $7.7 billion to $7.1 billion over the same time.

Kibsgaard said the company increased North American sales by 4 percent compared to the third quarter as oil producers. The company paid $234 million in workforce reduction costs in the fourth quarter, a little more than half of what it paid in the same period in 2015. It also paid $165 million in facility closure costs, and $39 million in contract termination costs, among other quarterly charges.